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CeconomyFiscal 2017 Annual Report UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended October 1, 2017 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number: 0-20322 Starbucks Corporation (Exact Name of Registrant as Specified in its Charter) Washington (State of Incorporation) 91-1325671 (IRS Employer ID) 2401 Utah Avenue South, Seattle, Washington 98134 (206) 447-1575 (Address of principal executive offices, zip code, telephone number) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $0.001 par value per share g Name of Each Exchange on Which Registered Nasdaq Global Select Market g Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): No No N Yes Yes No No Large accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price of the registrant’s common stock on April 2, 2017 as reported on the NASDAQ Global Select Market was $82 billion. As of November 10, 2017, there were 1,422.8 million shares of the registrant’s Common Stock outstanding. No Portions of the definitive Proxy Statement for the registrant’s Annual Meeting of Shareholders to be held on March 21, 2018 have been incorporated by reference into Part III of this Annual Report on Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE STARBUCKS CORPORATION Form 10-K For the Fiscal r YearYY Ended r r October 1, 2017 F TABLE OF TT CONTENTS PART I Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Index For Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 Item 5 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B Item 10 Item 11 Item 12 Item 13 Item 14 Item 15 SIGNATURES Exhibits, Financial Statement Schedules PART IV 2 10 17 17 17 17 18 20 23 45 46 51 85 86 86 88 89 89 89 89 89 90 97 CAUTIONARYRR NOTE REGARDING FOR Y WRR ARD-LOOKING ST WW ATT TEMENTS AA A This Annual Report on Form 10-K includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. You should not place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether WW as a result of new information, future events or otherwise. WW YY yy ff Starbucks Corporation 2017 Form 10-K 1 Item 1. Business General PART I WW Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world, operating in 1985, Starbucks Corporation’s common stock trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol ff fees that we sell, along with handcrafted cof fee, tea and other beverages and a ff “SBUX.” We purchase and roast high-quality cof variety of high-quality food items, including snack offerings, through company-operated stores. ff We also sell a variety of cof fee WW and tea products and license our trademarks through other channels such as licensed stores, grocery and foodservice accounts. In addition to our flagship Starbucks Coffee brand, we sell goods and services under the following brands: Seattle’s Best Coffee, Evolution Fresh, La Boulange and Ethos. 75 countries. Formed in TT Teavana, TT Tazo, ff ff ff ff Our objective is to maintain Starbucks standing as one of the most recognized and respected brands in the world. To achieve this, we are continuing the disciplined expansion of our global store base, adding stores in both existing, developed markets such as the U.S., and in newer, higher growth markets such as China, as well as optimizing the mix of company-operated and licensed stores in each market. In addition, by leveraging the experience gained through our traditional store model, we continue to offer consumers new cof ff fee and other products in a variety of forms, across new categories, diverse channels and alternative store formats. We also believe our Starbucks Global Social Impact strategy yy , commitments related to ethically sourcing high-quality coffee, contributing positively to the communities we do business in and being an employer of choice are contributors to our objective. WW TT ff ff In this Annual Report on Form 10-K (“10-K” or “Report”) for the fiscal year ended October 1, 2017 (“fiscal 2017”), Starbucks Corporation (together with its subsidiaries) is referred to as “Starbucks,” the “Company,” “we,” “us” or “our .” yy Segment Financial Information r four reportable operating segments: 1) We have Americas, which is inclusive of the U.S., Canada, and Latin America; 2) China/ WW WW Asia Pacific (“CAP”); 3) Europe, Middle East, and Africa (“EMEA”) and 4) Channel Development. We also have several non- ff reportable operating segments, including Teavana retail stores and Seattle's Best Cof fee, as well as certain developing TT businesses such as Siren Retail, which includes the Starbucks ReserveTM Roastery & Tasting Rooms, certain Starbucks TT ReserveTM locations and Princi operations. Collectively, the combined group of non-reportable operating segments will be referred to as All Other Segments. Revenues from our reportable segments and All Other Segments as a percentage of total net revenues for fiscal 2017 were as follows: Americas (70%), CAP (P 14%), EMEA (A 5%), Channel Development (9%) and All Other Segments (2%). yy PP segments include both company-operated and licensed stores. Our Americas segment is our Our Americas, CAP, and EMEA A most mature business and has achieved significant scale. Certain markets within our CAP and EMEA A early stages of development and require a more extensive support organization, relative to their current levels of revenue and operating income, than our Americas operations. The Americas, CAP and EMEA A accounts, primarily in Canada, Japan and the U.K. segments also include certain foodservice operations are still in the P P Our Channel Development segment includes roasted whole bean and ground coffees, premium TT Tazo-branded single-serve products, a variety of ready-to-drink beverages, such as Frappuccino Starbucks Refreshers® beverages and other branded products sold worldwide through channels such as grocery stores, warehouse clubs, specialty retailers, convenience stores and U.S. foodservice accounts. ® teas, Starbucks- and TazoTT ®, Starbucks Doubleshot® and ff Starbucks segment information is included in Note 16, Segment Reporting, to the consolidated financial statements included in Item 8 of Part II of this 10-K. 2 Starbucks Corporation 2017 Form 10-K Revenue Components We generate nearly all of our revenues through company-operated stores, licensed stores, consumer packaged goods (“CPG”) WW and foodservice operations. Company-operated and Licensed Store Summary as of October 1, 2017 r stores Licensed stores Total Americas 9,413 7,146 16,559 As a% of Total Americas Stores CAP As a % of Total CAP Stores As a % of Total EMEA Stores As a% of Total All Other Segments Stores All Other Segments EMEA As a% of Total Stores Total 57 % 3,070 43 % 4,409 100% 7,479 41 % 502 59 % 2,472 100% 2,974 17 % 83 % 100% 290 37 327 89 % 13,275 11 % 14,064 100% 27,339 49 % 51 % 100% The mix of company-operated versus licensed stores in a given market will vary based on several factors, including our ability to access desirable local retail space, the complexity and expected ultimate size of the market for Starbucks and our ability to leverage the support infrastructure within a geographic region. Company-operated Stores Revenue from company-operated stores accounted for 79% of total net revenues during fiscal 2017. Our retail objective is to be the leading retailer and brand of coffee and tea in each of our tar get markets by selling the finest quality coffee, tea and related ff products, as well as complementary food and snack offerings, and by providing each customer with a unique Experience. The Starbucks Experience is built upon superior customer service and a seamless digital experience as well as clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty. Starbucks ff ff Our strategy for expanding our global retail business is to increase our market share in a disciplined manner, by selectively opening additional stores in new and existing markets, as well as increasing sales in existing stores, to support our long-term strategic objective to maintain Starbucks standing as one of the most recognized and respected brands in the world. Store growth in specific existing markets will vary due to many factors, including expected financial returns, the maturity of the market, economic conditions, consumer behavior and local business practices. Starbucks Corporation 2017 Form 10-K 3 Company-operated store data for the year-ended October 1, 2017: Stores Open as of Oct 2, 2016 Opened Closed Transfers Net Stores Open as of Oct 1, 2017 Americas: U.S. Canada Brazil Total Americas China/Asia Pacific(1): China Japan Thailand Singapore Total China/Asia Pacific EMEA: U.K. All Other Total EMEA All Other Segments: Teavana Evolution Fresh Siren Retail 7,880 1,035 104 9,019 1,272 1,140 273 126 2,811 366 157 523 355 2 1 Total All Other Segments Total company-operated 358 12,711 372 45 5 422 285 90 39 10 424 14 2 16 — — 1 1 863 (30) (8) (1) (39) (17) (12) — (3) (32) (21) (2) (23) (67) (2) — (69) (163) — 11 — 11 — — — (133) (133) (14) — (14) — — — — (136) 342 48 4 394 268 78 39 (126) 259 (21) — (21) (67) (2) 1 (68) 564 8,222 1,083 108 9,413 1,540 1,218 312 — 3,070 345 157 502 288 — 2 290 13,275 (1) China/Asia Pacific store data includes the transfer of 133 Singapore company-operated retail stores to licensed stores as a result of the sale to Maxim's Caterers Limited in the fourth quarter of fiscal 2017. Starbucks® company-operated stores are typically located in high-traffic, high-visibility locations. Our ability to vary the size and format of our stores allows us to locate them in or near a variety of settings, including downtown and suburban retail centers, office buildings, university campuses and in select rural and of ff f-highway locations. our stores, inclusive of Drive Thru formats that provide a higher degree of access and convenience, and alternative store formats, which are focused on an elevated Starbucks Experience for our customers. WW We are continuing the expansion of ff ff Retail sales mix by product type for company-operated stores: Fiscal Year Ended Beverages Food Packaged and single-serve coffees and teas Other(1) Total Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 73% 20% 3% 4% 100% 74% 19% 3% 4% 100% 73% 19% 3% 5% 100% (1) “Other” primarily consists of sales of serveware, ready-to-drink beverages and coffee-making equipment, among other items. ff 4 Starbucks Corporation 2017 Form 10-K VV Stored Vrr alue Car dsrr The Starbucks Card, our branded stored value card program, is designed to provide customers with a convenient payment method, support gifting and increase the frequency of store visits by cardholders, in part through the related Starbucks Rewards™ (previously My Starbucks Rewards®) loyalty program where available, as discussed below. Stored value cards are issued to customers when they initially load them with an account balance. They can be obtained in our company-operated and most licensed stores in North America, China, Japan, Latin America, and many of our markets in our CAP and EMEA segments. Stored value cards can also be obtained on-line, via the Starbucks® Mobile App, and through other U.S. and international retailers. Customers may access their card balances by utilizing their stored value card or the Starbucks® Mobile App in participating stores, which also include certain Teavana Starbucks® Mobile App, customers can also place orders in advance for pick-up at certain participating locations in the U.S. and Canada. In nearly all markets, including the U.S. and Canada, customers who register their cards are automatically enrolled in the Starbucks Rewards™ program. Registered members can receive various benefits depending on factors such as the number of reward points (“Stars”) earned. Refer to Note 1, Summary of Significant Accounting Policies, included in Item 8 of Part II of this 10-K, for further discussion of our stored value cards and loyalty program. ™ locations. Using the Mobile Order and Pay functionality of the TT P Licensed Stores Revenues from our licensed stores accounted for 11% of total net revenues in fiscal 2017. Licensed stores generally have a lower gross margin and 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 our share of costs as these are primarily incurred by the licensee. ff In our licensed store operations, we leverage the expertise of our local partners and share our operating and store development experience. Licensees provide improved, and at times the only, access to desirable retail space. Most licensees are prominent yy retailers with in-depth market knowledge and access. As part of these arrangements, we sell coffee, tea, food and related products to licensees for resale to customers and receive royalties and license fees from the licensees. We also sell certain equipment, such as coffee brewers and espresso machines, to our licensees for use in their operations. Employees working in licensed retail locations are required to follow our detailed store operating procedures and attend training classes similar to those given to employees in company-operated stores. For Starbucks® and Teavana markets, we also use traditional franchising and include these stores in the results of operations from our other licensed stores. ™ stores within certain international WW TT ff ff Starbucks Corporation 2017 Form 10-K 5 Licensed store data for the year-ended October 1, 2017: Stores Open as of Oct 2, 2016 Opened Closed Transfers Net Stores Open as of Oct 1, 2017 Americas: U.S. Mexico Latin America Canada Total Americas China/Asia Pacific(1): China Korea Taiwan Philippines Indonesia Malaysia All Other Total China/Asia Pacific EMEA: U.K. Turkey United Arab Emirates Germany Saudi Arabia Kuwait Russia Spain All Other Total EMEA All Other Segments: Teavana Seattle's Best Coffee Total All Other Segments Total licensed 5,292 563 369 364 6,588 1,110 952 392 293 260 226 399 3,632 532 314 148 161 92 95 107 96 574 2,119 34 1 35 12,374 477 71 66 32 646 310 164 33 32 62 24 76 701 69 80 21 6 32 24 11 23 132 398 4 — 4 1,749 (61) (2) (6) (8) (77) (24) (8) (5) (1) (5) (2) (12) (57) (9) (7) (5) (11) — (1) (3) (6) (17) (59) (1) (1) (2) (195) — — — (11) (11) — — — — — — 133 133 14 — — — — — — — — 14 — — — 136 416 69 60 13 558 286 156 28 31 57 22 197 777 74 73 16 (5) 32 23 8 17 115 353 5,708 632 429 377 7,146 1,396 1,108 420 324 317 248 596 4,409 606 387 164 156 124 118 115 113 689 2,472 3 (1) 2 1,690 37 — 37 14,064 (1) China/Asia Pacific store data includes the transfer of 133 Singapore company-operated retail stores to licensed stores as a result of the sale to Maxim's Caterers Limited in the fourth quarter of fiscal 2017. Consumer Packaged Goods r Revenues from sales of consumer packaged goods comprised 8% of total net revenues in fiscal 2017. Our consumer packaged goods business includes both domestic and international sales of packaged coffee and tea as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery yy , warehouse clubs and specialty retail stores. It also includes ff revenues from product sales to and licensing revenues from manufacturers that produce and market Starbucks-, Seattle’s Best Coffee- and TT Tazo-branded products through licensing agreements. ff ff 6 Starbucks Corporation 2017 Form 10-K Foodservice ® roasted whole bean and ground coffees, a selection of premium Revenues from foodservice accounts comprised 2% of total net revenues in fiscal 2017. We sell Starbucks Coffeeff , education, healthcare, coffee and tea-related products to institutional foodservice companies that service business and industry yy ff ® through office cof s Best Coffeeff ff fee distributors, hotels, restaurants, airlines and other retailers. ff arrangements with national accounts. The majority of the sales in this channel come through national broadline distribution networks with SYSCO Corporation, U.S. Foodservice and other distributors. ® teas, Starbucks VIA® Ready Brew, and other WW We also sell our Seattle’ TazoTT WW ww ® and Seattle’s Best ff Product Supply ff Starbucks is committed to selling the finest whole bean coffees and cof ff fee beverages. ff fee purchasing, roasting and packaging and the global distribution of cof fee used in our ff coffee standards, we control cof operations. We purchase green cof ff fee beans from multiple cof fee-producing regions around the world and custom roast them to ff our exacting standards for our many blends and single origin coffees. TT To ensure compliance with our rigorous WW ff ff ff ff ff . Although most coffee trades in the commodity market, high-altitude The price of coffee is subject to significant volatility arabica coffee of the quality sought by Starbucks tends to trade on a negotiated basis at a premium above the “C” cof commodity price. Both the premium and the commodity price depend upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather disease, general increase in farm inputs and costs of production, inventory levels and political and economic conditions. Price is also impacted by trading activities in the arabica coffee futures market, including hedge funds and commodity index funds. In addition, green coffee prices have been af ff fected in the past, and may be af fected in the future, by the actions of certain ff organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. , natural disasters, crop feeff ff ff ff ff ff ff fee using fixed-price and price-to-be-fixed purchase commitments, depending on market conditions, to secure an We buy cof ff WW adequate supply of quality green coffee. Price-to-be-fixed contracts are purchase commitments whereby the quality ,yy yy , quantity delivery period, and other negotiated terms are agreed upon, but the date, and therefore the price, at which the base “C” coffee commodity price component will be fixed has not yet been established. For most contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. For other contracts, Starbucks and the seller may agree upon pricing parameters determined by the base “C” coffee commodity price. Until prices are fixed, we estimate the total cost of these purchase commitments. Total green cof ff fee purchase commitments as of comprised of $860 million under fixed-price contracts and an estimated $336 million under price-to-be-fixed contracts. As of All price- ff October 1, 2017, none of our price-to-be-fixed contracts were effectively fixed through the use of futures contracts. to-be-fixed contracts as of October 1, 2017 were at the Company’s option to fix the base “C” coffee commodity price component. Total purchase commitments, together with existing inventory yy , are expected to provide an adequate supply of green coffee through fiscal October 1, 2017 were $1.2 billion, 2018. TT TT ff ff ff ff ff We depend upon our relationships with cof ff fee producers, outside trading companies and exporters for our supply of green WW coffee. commitments is remote. ff We believe, based on relationships established with our suppliers, the risk of non-delivery on such purchase WW ,yy fee industry ff fee and to reinforce our leadership role in the cof ff To help ensure the future supply of high-quality green cof TT ff Starbucks operates eight farmer support centers. t experts who work with coffee farming communities to promote best practices in cof ff fee production designed to improve both yy coffee quality , yields and agronomy support to address climate and other impacts. The farmer support centers are staffed with agronomists and sustainability ff ff ff In addition to coffee, we also purchase significant amounts of dairy products, particularly fluid milk, to support the needs of our company-operated stores. We believe, based on relationships established with our dairy suppliers, that the risk of non-delivery WW of sufficient fluid milk to support our stores is remote. ff ff ® stores include tea and a number of ready-to- ff Products other than whole bean coffees and cof fee beverages sold in Starbucks drink beverages that are purchased from several specialty suppliers, usually under long-term supply contracts. Food products, such as pastries, breakfast sandwiches and lunch items, are purchased from national, regional and local sources. Our food program continues to develop, and we expect the amount of food products purchased to impact our operations. We alsoWW purchase a broad range of paper and plastic products, such as cups and cutlery, from several companies to support the needs of our retail stores as well as our manufacturing and distribution operations. We believe, based on relationships established with these suppliers and manufacturers, that the risk of non-delivery of sufficient amounts of these items is remote. WW yy ff Starbucks Corporation 2017 Form 10-K 7 Competition ff WW Our primary competitors for coffee beverage sales are specialty cof ff fee shops of fering premium and artisanal products and ff experiences. In almost all markets in which we do business, there are numerous competitors in the specialty coffee beverage business. We believe that our customers choose among specialty cof ,yy fee retailers primarily on the basis of product quality ff service and convenience, as well as price. We continue to experience direct competition from lar quick-service restaurant sector and the U.S. ready-to-drink coffee beverage market, in addition to well-established companies in WW many international markets. We also compete with restaurants and other specialty retailers for prime retail locations and qualified personnel to operate both new and existing stores. ge competitors in the U.S. WW ff ff ff Our coffee and tea products sold through our Channel Development segment compete directly against specialty cof ff fees and teas sold through grocery stores, warehouse clubs, specialty retailers, convenience stores and U.S. foodservice accounts and compete indirectly against all other coffees and teas on the market. ff TT Trademarks, Copyrights, Patents and Domain Names Starbucks owns and has applied to register numerous trademarks and service marks in the U.S. and in other countries s throughout the world. Some of our trademarks, including Starbucks, the Starbucks logo, Starbucks Reserve, Tazo, Seattle’ Best Coffee, The duration of trademark registrations varies from country to country. However, trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are properly maintained. VIA and La Boulange are of material importance. TT Teavana, Frappuccino, Starbucks A TT ff WW We own numerous copyrights for items such as product packaging, promotional materials, in-store graphics and training materials. We also hold patents on certain products, systems and designs. In addition, Starbucks has registered and maintains numerous Internet domain names, including “Starbucks.com,” “Starbucks.net,” “Tazo.com,” “Seattlesbest.com” and TT “Teavana.com.” WW TT Seasonality and Quarterly Results Our business is subject to moderate seasonal fluctuations, of which our fiscal second quarter typically experiences lower revenues and operating income. Additionally, as Starbucks Cards are issued to and loaded by customers during the holiday season, we tend to have higher cash flows from operations during the first quarter of the fiscal year. However, since revenues from Starbucks Cards are recognized upon redemption and not when cash is loaded onto the Card, the impact of seasonal fluctuations on the consolidated statements of earnings is much less pronounced. As a result of moderate seasonal fluctuations, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. yy Employees Starbucks employed approximately 277,000 people worldwide as of October 1, 2017. In the U.S., Starbucks employed approximately 185,000 people, with approximately 175,000 in company-operated stores and the remainder in support facilities, store development, and roasting, manufacturing, warehousing and distribution operations. Approximately 92,000 employees were employed outside of the U.S., with approximately 89,000 in company-operated stores and the remainder in regional support operations. The number of Starbucks employees represented by unions is not significant. We believe our current relations with our employees are good. WW Executive Officers of the Registrant Name Howard Schultz Kevin R. Johnson Rosalind G. Brewer Cliff Burrows John Culver Scott Maw Age 64 57 55 58 57 50 Position executive chairman president and chief executive officer group president, Americas and chief operating officer group president, Siren Retail group president, International and Channels (1) executive vice president, chief financial officer senior vice president, interim general counsel Paul Mutty (1) Channels includes various business groups, including channel development and certain emerging brands, including Seattle's Best Coffee and Evolution Fresh. 58 ff 8 Starbucks Corporation 2017 Form 10-K z Howard Schultz is the founder of Starbucks Corporation and has served as executive chairman since has served as chairman of the board of directors since Starbucks inception in 1985, and in January 2008, he reassumed the role of president and chief executive officer March 2015. From June 2000 to February 2005, Mr. Schultz also held the title of chief global strategist. From November 1985 to June 2000, he served as chairman of the board and chief executive officer . From November 1985 to June 1994, Mr. Schultz also served as president. From January 1986 to July 1987, Mr. Schultz was the chairman of the board, chief executive officer , a predecessor to the Company and president of Il Giornale Coffee Company . From September 1982 to December 1985, Mr. yy . , a predecessor to the Company yy Schultz was the director of retail operations and marketing for Starbucks Coffee Company ff . He served as chief executive officer until April 2017 and served as president until April 2017. Mr. Schultz ff ff ff ff ff ff ff Kevin R. Johnson has served as president and chief executive officer since March 2009. Mr. Johnson served as president and chief operating officer from March 2015 to as Chief Executive Officer of Juniper Networks, Inc., a leading provider of high-performance networking products and services, from September 2008 to December 2013. He also served on the Board of Directors of Juniper Networks from September 2008 through February 2014. Prior to joining Juniper Networks, Mr. Johnson served as President, Platforms and Services Division for Microsoft Corporation, a worldwide provider of software, services and solutions. Mr. Johnson was a member of Microsoft’s Senior Leadership Team and held a number of senior executive positions over the course of his 16 years at Microsoft. Prior to joining Microsoft in 1992, Mr. Johnson worked in International Business Machine Corp.’s systems integration and consulting business. April 2017, and has been a Starbucks director since April 2017. Mr. Johnson served TT ff ff VV VV Rosalind G. Brewer has served as group president, Americas and chief operating officer since October 2017, and has been a director of Starbucks since March 2017. Ms. Brewer served as President and Chief Executive Officer of Sam's Club, a membership-only retail warehouse club and a division of Walmart, from February 2012 to February 2017. Previously yy , Ms. WW 1 to January 2012; Brewer was Executive Vice President and President of Executive Vice President and President of VV 1; Senior Vice President and Division President of the Southeast Operating Division from March 2007 to January 2010; and Regional General Manager, Georgia Operations, from 2006 to February 2007. Prior to joining Walmart, Ms. Brewer was President of Global Nonwovens Division for Kimberly-Clark Corporation, a global health and hygiene products company, from 2004 to 2006 and held various management positions at Kimberly-Clark Corporation from 1984 to 2006. She serves as the Chair of the Board of Trustees for Spelman College and formerly served on the Board of Directors for Lockheed Martin Corporation and Molson Coors Brewing Company. WW Walmart South from February 2010 to February 201 WW Walmart's East Business Unit from February 201 WW TT yy ff ff Cliff Burrows joined Starbucks in April 2001 and has served as group president, Siren Retail, since September 2016, which includes the Starbucks ReserveTM Roastery & Tasting Rooms, Starbucks Reserve brand and products and Princi operations. Mr TT . TT Teavana brand. From July 2015 to September 2016, he served as group president, Burrows also oversees Global Coffee and the U.S. and Americas. From February 2014 to June 2015, he served as group president, U.S., Americas and Teavana. From May TT 2013 to February 2014, he served as group president, Americas and U.S., EMEA (Europe, Middle East and Teavana. Mr TT president, Starbucks Coffee U.S. from March 2008 to October 201 2008. He served as vice president and managing director, U.K. prior to April 2006. Prior to joining Starbucks, Mr. Burrows served in various management positions with Habitat Designs Limited, a furniture and housewares retailer. Africa) and ff Americas and U.S. from October 2011 to May 2013 and as . Burrows served as president, Starbucks Coffee 1. He served as president, EMEA from April 2006 to March A A ff John Culver joined Starbucks in August 2002 and has served as group president, International and Channels, since October 2017. From September 2016 to October 2017, he served as group president, Starbucks Global Retail. From May 2013 to September 2016, he served as group president, China, Asia Pacific, Channel Development and Emerging Brands. Mr. Culver served as president, Starbucks Coffee China and October 2011, he served as president, Starbucks Coffee International. Mr Global Consumer Products, Foodservice and Seattle’s Best Coffee from February 2009 to September 2009, and then as ff president, Global Consumer Products and Foodservice from October 2009 to November 2009. He previously served as senior vice president; president, Starbucks Coffee manager, Foodservice from August 2002 to January 2007. ff Asia Pacific from January 2007 to February 2009, and vice president; general Asia Pacific from October 2011 to May 2013. From December 2009 to . Culver served as executive vice president; president, ff ff Scott Maw joined Starbucks in August 2011 and has served as executive vice president, chief financial officer since February 2014. From October 2012 to February 2014, he served as senior vice president, Corporate Finance and as corporate controller from August 2011 to October 2012. Prior to joining Starbucks, Mr. Maw served as chief financial officer of SeaBright Insurance Company from February 2010 to August 2011. From October 2008 to February 2010, Mr. Maw served as chief financial officer of the Consumer Banking division of JPMor Mutual Bank prior to its acquisition by Chase. From 1994 to 2003, he served in various finance leadership positions at General Electric Company. Mr. Maw serves on the Board of Directors of Avista Corporation. gan Chase & Co., having held a similar position at Washington WW AA ff ff ff Starbucks Corporation 2017 Form 10-K 9 Paul Mutty joined Starbucks in September 1998 and has served as senior vice president, interim general counsel since August 2017. From July 2011 to July 2017, he served as senior vice president, deputy general counsel and assistant secretary. Mr. Mutty previously served as vice president, assistant general counsel from June 2002 to July 2011 and as director, corporate counsel from September 1998 to June 2002. Mr. Mutty has previously led the Starbucks legal department's EMEA region, Channel Development, Starbucks Law & Corporate Affairs business operations, global commercial, litigation, regulatory ,yy technology, real estate and licensing legal teams. Prior to joining Starbucks, Mr general counsel for SP Investments, Inc., from May 1996 to September 1998. Mr of Riddell, Williams, Bullitt & to 1996. . Mutty was formerly with the Seattle law firm , where he was a corporate attorney from 1986 to 1996 and was a partner from 1992 . Mutty served as executive vice president and ww Walkinshaw WW W A P yy ff Global Social Impact ff WW We are committed to being a deeply responsible company in the communities where we do business. Our focus is on ethically sourcing high-quality coffee, reducing our environmental impacts and contributing positively to communities around the world. Starbucks Global Social Impact strategy and commitments are integral to our overall business strategy. As a result, we believe we deliver benefits to our stakeholders, including employees, business partners, customers, suppliers, shareholders, community members and others. For an overview of Starbucks Global Social Impact strategy and commitments, please visit www.starbucks.com/responsibility. AA Available Information Starbucks 10-K reports, along with all other reports and amendments filed with or furnished to the Securities and Exchange Commission (“SEC”), are publicly available free of charge on the Investor Relations section of our website at investor.starbucks.com or at www.sec.gov as soon as reasonably practicable after these materials are filed with or furnished to the SEC. Our corporate governance policies, code of ethics and Board committee charters and policies are also posted on the Investor Relations section of Starbucks website at investor.starbucks.com. The information on our website is not part of this or any other report Starbucks files with, or furnishes to, the SEC. Item 1A. Risk Factors YY You should carefully consider the risks described below described below actually occurs, our business, financial condition and results of operations, and the trading price of our common stock could be materially and adversely affected. Moreover environment. New factors emerge from time to time and it is not possible to predict the impact of all these factors on our business, financial condition or results of operations. , we operate in a very competitive and rapidly changing . If any of the risks and uncertainties described in the cautionary factors ff • Economic conditions in the U.S. and international markets could adversely affect our business and financial results. ff As a retailer that is dependent upon consumer discretionary spending, our results of operations are sensitive to changes in or uncertainty about macro-economic conditions. Our customers may have less money for discretionary purchases and may stop or reduce their purchases of our products or trade down to Starbucks or competitors' lower priced products as a result of job losses, foreclosures, bankruptcies, increased fuel and energy costs, higher interest rates, higher taxes, reduced access to credit and economic uncertainty. These factors may also result in a general downturn in the restaurant industry. Decreases in customer traffic and/or average value per transaction will negatively impact our financial performance as reduced revenues without a corresponding decrease in expenses result in sales de-leveraging, which creates downward pressure on margins and also negatively impacts comparable store sales, net revenues, operating income and earnings per share. There is also a risk that if negative economic conditions or uncertainty persist for a long period of time or worsen, consumers may make long-lasting changes to their discretionary purchasing behavior, including less frequent discretionary purchases on a more permanent basis. ff • Our success depends substantially on the value of our brands and failure to preserve their value, either through our actions or those of our business partners, could have a negative impact on our financial results. WW We believe we have built an excellent reputation globally for the quality of our products, for delivery of a consistently positive consumer experience and for our corporate social responsibility programs. The Starbucks brand is recognized throughout the world and we have received high ratings in global brand value studies. To be successful in the future, particularly outside of the U.S., where the Starbucks brand and our other brands are less well-known, we believe we must preserve, grow and leverage the value of our brands across all sales channels. Brand value is based in part on consumer perceptions on a variety of subjective qualities. TT 10 Starbucks Corporation 2017 Form 10-K yy Additionally, our business strategy yy , including our plans for new stores, foodservice, branded products and other initiatives, relies significantly on a variety of business partners, including licensee and joint venture relationships, particularly in our international markets, and third party manufacturers, distributors and retailers, particularly in our international Channel Development business. Licensees and foodservice operators are often authorized to use our logos and provide branded food, beverage and other products directly to customers. We provide training and support to, and monitor the operations of, certain of these business partners, but the product quality and service they deliver may be diminished by any number of factors beyond our control, including financial pressures they may face. We believe customers expect the same quality of products and service from our licensees as they do from us and we strive to ensure customers receive the same quality of products and service experience whether they visit a company-operated store or a licensed store. We also source our food, beverage and other products from a wide variety of domestic and international business partners in our supply chain operations, and in certain cases such products are produced or sourced by our licensees directly. And although foodservice operators are authorized to use our logos and provide branded products as part of their foodservice business, we do not monitor the quality of non-Starbucks products served in those locations. WW WW WW Business incidents, whether isolated or recurring and whether originating from us or our business partners, that erode consumer trust, such as actual or perceived breaches of privacy or violations of domestic or international privacy laws, contaminated food, store employees or other food handlers infected with communicable diseases, product recalls or other potential incidents discussed in this risk factors section, particularly if the incidents receive considerable publicity, including rapidly through social or digital media, or result in litigation, and failure to respond appropriately to these incidents, can significantly reduce brand value, result in civil and criminal liability and have a negative impact on our financial results. Consumer demand for our products and our brand equity could diminish significantly if we or our licensees or other business partners fail to preserve the quality of our products, are perceived to act in an unethical or socially irresponsible manner, including with respect to the sourcing, content or sale of our products or the use of customer data, fail to comply with laws and regulations or fail to deliver a consistently positive consumer experience in each of our markets, including by failing to invest in the right balance of wages and benefits to attract and retain employees that represent the brand well. Additionally, inconsistent uses of our brand and other of our intellectual property assets, as well as failure to protect our intellectual property, including from unauthorized uses of our brand or other of our intellectual property assets, can erode consumer trust and our brand value and have a negative impact on our financial results. yy yy yy • Incidents involving food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling, whether or not accurate, as well as adverse public or medical opinions about the health effects of consuming our products, could harm our business. ff ff Instances or reports, whether true or not, of unclean water supply or food-safety issues, such as food or beverage-borne illnesses, tampering, adulteration, contamination or mislabeling, either during growing, manufacturing, packaging, storing or preparation, have in the past severely injured the reputations of companies in the food and beverage processing, grocery and quick-service restaurant sectors and could affect us as well. Any report linking us to the use of unclean water, food or beverage- borne illnesses, tampering, adulteration, contamination, mislabeling or other food or beverage-safety issues could damage our brand value and severely hurt sales of our food and beverage products and possibly lead to product liability claims, litigation (including class actions) or damages. Clean water is critical to the preparation of coffee, tea and other beverages and our ability to ensure a clean water supply to our stores can be limited, particularly in some international locations. We are also continuing to incorporate more products in our food and beverage lineup that require freezing or refrigeration, including produce (such as fruits and vegetables in our salads and juices), dairy products (such as milk and cheeses), non-dairy alternative products (such as soymilk and almondmilk) and meats. Additionally, we are evolving our product lineup to include more local or smaller suppliers for some of our products who may not have as rigorous quality and safety systems and protocols as larger or more national suppliers. If customers become ill from food or beverage-borne illnesses, tampering, adulteration, contamination, mislabeling or other food or beverage-safety issues, we could be forced to temporarily close some stores and/or supply chain facilities, as well as recall products. In addition, instances of food or beverage-safety issues, even those involving solely the restaurants or stores of competitors or of suppliers or distributors (regardless of whether we use or have used those suppliers or distributors), could, by resulting in negative publicity about us or the foodservice industry in general, adversely affect our sales on a regional or global basis. A decrease in customer traf yy fic as a result of food-safety concerns or negative publicity , or as a ff result of a temporary closure of any of our stores, product recalls or food or beverage-safety claims or litigation, could materially harm our business and results of operations. WW A yy ff ff ff Some of our products contain caffeine, dairy products, sugar and other compounds and aller the subject of public and regulatory scrutiny, including the suggestion that excessive consumption of caf ff feine, dairy products, sugar and other compounds can lead to a variety of adverse health effects. Particularly in the U.S., there is increasing consumer awareness of health risks, including obesity, due in part to increased publicity and attention from health or as increased consumer litigation based on alleged adverse health impacts of consumption of various food and beverage products. While we have a variety of beverage and food items, including items that are coffee-free and have reduced calories, ff gens, the health effects of which are ganizations, as well yy yy ff ff Starbucks Corporation 2017 Form 10-K 11 an unfavorable report on the health effects of caf ff feine or other compounds present in our products, whether accurate or not, potential imposition of additional taxes on certain types of beverages, or negative publicity or litigation arising from certain health risks could significantly reduce the demand for our beverages and food products and could materially harm our business and results of operations. ff • The unauthorized access, use, theft or destruction of customer or employee personal, financial or other data or of Starbucks proprietary or confidential information that is stored in our information systems or by third parties on our behalf could impact our reputation and brand and expose us to potential liability and loss of revenues. TT Our information technology systems, such as those we use for our point-of-sale, web and mobile platforms, including online and mobile payment systems and rewards programs, and for administrative functions, including human resources, payroll, accounting and internal and external communications, as well as the information technology systems of our third party business partners and service providers, can contain personal, financial or other information that is entrusted to us by our customers and employees. Our information technology systems also contain Starbucks proprietary and other confidential information related to our business, such as business plans, product development initiatives and designs. Similar to many other retail companies and because of the prominence of our brand, we have experienced frequent attempts to compromise our information technology systems. To the extent we or a third party were to experience a material breach of our or such third party’ technology systems that result in the unauthorized access, theft, use or destruction of customers' or employees' data or that of the Company stored in such systems, including through cyber-attacks or other external or internal methods, it could result in a material loss of revenues from the potential adverse impact to our reputation and brand, our ability to retain or attract new customers and the potential disruption to our business and plans. Such security breaches also could result in a violation of applicable U.S. and international privacy and other laws, and subject us to private consumer or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. For example, the European Union adopted a new regulation that becomes effective in May 2018, called the General Data Protection Regulation (“GDPR”), which requires companies to meet new requirements regarding the handling of personal data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Failure to meet GDPR requirements could result in penalties of up to 4% of worldwide revenue. Our reputation and brand and our ability to attract new customers could also be adversely impacted if we fail, or are perceived to have failed, to properly respond to these incidents. Such failure to properly respond could also result in similar exposure to liability. s information ff Significant capital investments and other expenditures could be required to remedy the problem and prevent future breaches, including costs associated with additional security technologies, personnel, experts and credit monitoring services for those whose data has been breached. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not meaningfully limit the success of future attempts to breach our information technology systems. Media or other reports of existing or perceived security vulnerabilities in our systems or those of our third party business partners or service providers, even if no breach has been attempted or has occurred, can also adversely impact our brand and -attacks yy reputation and materially impact our business. Additionally, the techniques and sophistication used to conduct cyber and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. We continue to make significant investments in technology, third party services and personnel to develop and implement systems and processes that are designed to anticipate cyber-attacks and to prevent or minimize breaches of our information technology systems or data loss, but these security measures cannot provide assurance that we will be successful in preventing such breaches or data loss. WW yy , interruption or WW yy • We rely heavily on information technology in our operations, and any material failure, inadequacy ff fect our security failure of that technology could harm our ability to effectively operate our business and could adversely af financial results. ff yy We rely heavily on information technology systems across our operations, including for administrative functions, point-of-sale WW processing and payment in our stores and online, management of our supply chain, Starbucks Cards, online business, mobile technology, including mobile payments and ordering apps, reloads and loyalty functionality and various other processes and transactions, and many of these systems are interdependent on one another for their functionality. Additionally, the success of several of our initiatives to drive growth, including our priority to increase digital relationships with our customers to drive incremental traffic and spend, is highly dependent on our technology systems. Our ability to ef ff fectively manage our business, launch digital and other initiatives, and coordinate the production, distribution, administration and sale of our products depends significantly on the reliability, integrity and capacity of these systems. some of these information technology systems and support. Additionally, our systems hardware, software and services provided by third party service providers are not fully redundant within a market or across our markets. Although we have operational ff safeguards in place, they may not be effective in preventing the failure of these systems or platforms to operate ef fectively and be available. Such failures may be caused by various factors, including power outages, catastrophic events, inadequate or We also rely on third party providers and platforms for WW yy yy yy ff ff 12 Starbucks Corporation 2017 Form 10-K ff ineffective redundancy yy , problems with transitioning to upgraded or replacement systems or platforms, flaws in third party software or services, errors by our employees or third party service providers, or a breach in the security of these systems or platforms, including through cyber-attacks such as those that result in the blockage of our or our third-party business partners’ or service providers’ systems and platforms and those discussed in more detail in this risk factors section. If our incident response, disaster recovery and business continuity plans do not resolve these issues in an effective manner they could cause material negative impacts to our product availability and sales, the efficiency of our operations and our financial results. ff ff ff • We may not be successful in implementing important strategic initiatives or ef fectively managing growth, which may have WW an adverse impact on our business and financial results. There is no assurance that we will be able to implement important strategic initiatives in accordance with our expectations, which may result in an adverse impact on our business and financial results. These strategic initiatives are designed to create growth, improve our results of operations and drive long-term shareholder value, and include: • being an employer of choice and investing in employees to deliver a superior customer experience; • building our leadership position around coffee, including through the development of Starbucks Reserve™ ff Roasteries and Starbucks Reserve™ stores; • driving convenience and brand engagement through our mobile, loyalty and digital capabilities; • increasing the scale of the Starbucks store footprint with disciplined global expansion and introducing flexible and unique store formats; • moving to a more licensed store model in some markets and a more company-owned model in other markets; • creating new occasions in stores across all dayparts with new product offerings, including our growing lunch food and ff beverage product lineup; • continuing the global growth of our Channel Development business; and • delivering continued growth in our tea business through the Teavana brand in our Starbucks TT ® retail stores and other channels and internationally. In addition to other factors listed in this risk factors section, factors that may adversely affect the successful implementation of these initiatives, which could adversely impact our business and financial results, include the following: ff • increases in labor costs, both domestically and internationally, such as general market and minimum wage levels and investing in competitive compensation, increased health care and workers’ compensation insurance costs and other benefits to attract and retain high quality employees with the right skill sets, whether due to regulatory mandates, changing industry practices or our expansion into new channels or technology dependent operations; yy • increasing competition in channels in which we operate or seek to operate from new and existing large competitors that sell high-quality specialty coffee beverages; ff • continuing disruption in retail caused by on-line commerce, resulting in reduced foot traffic to “brick & mortar” retail ff stores; • consumers shifting categories of where they spend their discretionary income away from outside-the-home food and beverage; • construction cost increases associated with new store openings and remodeling of existing stores; delays in store openings for reasons beyond our control or a lack of desirable real estate locations available for lease at reasonable rates, either of which could keep us from meeting annual store opening targets in the U.S. and internationally; • not successfully scaling our supply chain infrastructure as our product offerings increase and as we continue to expand, including our emphasis on a broad range of high-quality food offerings; ff ff • the ability of our licensee partners to implement our growth platforms and product innovation; • lack of customer acceptance of new products (including due to price increases necessary to cover the costs of new ® retail products or higher input costs), brands (such as the global expansion of the Teavana brand in our Starbucks stores and other channels) and platforms (such as mobile technology), or customers reducing their demand for our current offerings as new products are introduced; TT ff • the degree to which we enter into, maintain, develop and are able to negotiate appropriate terms and conditions of, and enforce, commercial and other agreements; • not successfully consummating favorable strategic transactions or integrating acquired businesses; and • the deterioration in our credit ratings, which could limit the availability of additional financing and increase the cost of obtaining financing to fund our initiatives. Additionally, our Channel Development business is also in part dependent on the level of support our retail business partners provide our products, and in some markets there are only a few retailers. If our retail business partners do not provide sufficient yy ff Starbucks Corporation 2017 Form 10-K 13 levels of support for our products, which is at their discretion, it could limit our ability to grow our Channel Development business. Also, a relatively small number of licensee partners own a large number of licensed stores. If such licensee partners are not able to access sufficient funds or financing, or are otherwise unable to successfully operate and grow their businesses, including their licensed stores, it could adversely affect our results in the markets in which they operate their licensed stores. ff ff ff Effectively managing growth can be challenging, particularly as we continue to expand into new channels outside the retail store model, increase our focus on our Channel Development business, grow our Teavana brand in our Starbucks and other channels, and expand into new markets internationally where we must balance the need for flexibility and a degree of autonomy for local management against the need for consistency with our goals, philosophy and standards. Growth can make it increasingly difficult to ensure a consistent supply of high-quality raw materials, to locate and hire suf ff ficient numbers of key employees, to maintain an effective system of internal controls for a globally dispersed enterprise and to train employees worldwide to deliver a consistently high quality product and customer experience. Furthermore, if we are not successful in implementing these strategic initiatives, such as large acquisitions and integrations, we may be required to evaluate whether certain assets, including goodwill and other intangibles, have become impaired. In the event we record an impairment charge, it could have a material impact on our financial results. ® retail stores TT r ff ff . yy • We face intense competition in each of our channels and markets, which could lead to reduced profitability WW ff ff yy ® stores and/or average value per transaction adversely affecting our sales and results of The specialty coffee market is intensely competitive, including with respect to product quality yy , innovation, service, convenience, and price, and we face significant and increasing competition in all these areas in each of our channels and ge markets. Accordingly, we do not have leadership positions in all channels and markets. In the U.S., the ongoing focus by lar competitors in the quick-service restaurant sector on selling high-quality specialty coffee beverages could lead to decreases in customer traffic to Starbucks operations. Similarly, continued competition from well-established competitors in our international markets could hinder Additionally, some of our competitors are also growth and adversely affect our sales and results of operations in those markets. our suppliers, which may result in their ability to offer competing products at a lower price than we do. Increased competition in the U.S. packaged coffee and tea and single-serve and ready-to-drink cof ge ff fee beverage markets, including from new and lar entrants to this market could adversely affect the profitability of the Channel Development segment. Furthermore, declines in general consumer demand for specialty coffee products for any reason, including due to consumer preference for other products ff or flattening demand for our products, could have a negative effect on our business, including from price discounting we may have to undertake. ff ff yy yy ff ff ff ff ff • We are highly dependent on the financial performance of our WW Americas operating segment. Our financial performance is highly dependent on our Americas operating segment, as it comprised approximately 70% of consolidated total net revenues in fiscal 2017. If the Americas operating segment revenue trends slow or decline, especially in our U.S. and Canada markets, our other segments may be unable to make up any significant shortfall and our business and And because the Americas segment is relatively mature and produces the large financial results could be adversely affected. majority of our operating cash flows, such a slowdown or decline could result in reduced cash flows for funding the expansion of our international business and other initiatives and for returning cash to shareholders. ff • We are increasingly dependent on the success of certain international markets in order to achieve our growth targets. WW Our future growth increasingly depends on the growth and sustained profitability of certain international markets. Some or all of our international market business units (“MBUs”), which we generally define by the countries in which they operate, may not be successful in their operations or in achieving expected growth, which ultimately requires achieving consistent, stable net revenues and earnings. The performance of these international operations may be adversely affected by economic downturns in one or more of the countries in which our large MBUs operate. The broader CAP market is now one of our two significant profit engines driving our global returns, along with our North American business. In particular, both our China and Japan MBUs contribute meaningfully to both consolidated and CAP net revenues and earnings and China in particular is a significant P market for our growth. A decline in performance of one or more of our significant international MBUs could have a material adverse impact on our consolidated results. A P ff yy TT Additionally, some factors that will be critical to the success of our international operations are dif ff ferent than those af fecting ff our U.S. stores and licensees. Tastes naturally vary by region, and consumers in some MBUs may not embrace our products to the same extent as consumers in the U.S. or other international markets. Occupancy costs and store operating expenses can be higher internationally than in the U.S. due to higher rents for prime store locations or costs of compliance with country-specific regulatory requirements. Because many of our international operations are in an early phase of development, operating expenses as a percentage of related revenues are often higher compared to more developed operations, such as in the U.S. Additionally, our international joint venture partners or licensees may face capital constraints or other factors that may limit the speed at which they are able to expand and develop in a certain market. yy 14 Starbucks Corporation 2017 Form 10-K Our international operations are also subject to additional inherent risks of conducting business abroad, such as: • foreign currency exchange rate fluctuations, or requirements to transact in specific currencies; yy • changes or uncertainties in economic, legal, regulatory, social and political conditions in our markets, as well as negative effects on U.S. businesses due to increasing anti-American sentiment in certain markets; ff • interpretation and application of laws and regulations, including tax, labor, merchandise, anti-bribery and privacy laws and regulations; • restrictive actions of foreign or U.S. governmental authorities affecting trade and foreign investment, especially during ff periods of heightened tension between the U.S. and such foreign governmental authorities, including protective measures such as export and customs duties and tariffs, government intervention favoring local competitors, and restrictions on the level of foreign ownership; ff • import or other business licensing requirements; • the enforceability of intellectual property and contract rights; • limitations on the repatriation of funds and foreign currency exchange restrictions due to current or new U.S. and international regulations; • in developing economies, the growth rate in the portion of the population achieving sufficient levels of disposable ff income may not be as fast as we forecast; ff • difficulty in staf fing, developing and managing foreign operations and supply chain logistics, including ensuring the ff consistency of product quality and service, due to governmental actions affecting supply chain logistics, distance, language and cultural differences, as well as challenges in recruiting and retaining high quality employees in local markets; ff ff • local laws that make it more expensive and complex to negotiate with, retain or terminate employees; • delays in store openings for reasons beyond our control, competition with locally relevant competitors or a lack of desirable real estate locations available for lease at reasonable rates, any of which could keep us from meeting annual store opening targets and, in turn, negatively impact net revenues, operating income and earnings per share; and • disruption in energy supplies affecting our markets. ff Moreover, many of the foregoing risks are particularly acute in developing countries, which are important to our long-term growth prospects. • Increases in the cost of high-quality arabica coffee beans or other commodities or decreases in the availability of high- quality arabica coffee beans or other commodities could have an adverse impact on our business and financial results. ff ff ff ff ff ff yy The price of coffee is ff arabica coffee beans and related cof fee products. We purchase, roast and sell high-quality whole bean ff WW subject to significant volatility and has and may again increase significantly due to one or more of the factors described below. The high-quality arabica coffee of the quality we seek tends to trade on a negotiated basis at a premium above the “C” price. This premium depends upon the supply and demand at the time of purchase and the amount of the premium can vary significantly. Increases in the “C” coffee commodity price do increase the price of high-quality our ability to enter into fixed-price purchase commitments. We frequently enter into supply contracts whereby the quality , yy WW quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore price, at which the base “C” These are known as price-to-be-fixed contracts. coffee commodity price component will be fixed has not yet been established. The supply and price of coffee we purchase can also be af ff fected by multiple factors in the producing countries, such as weather (including the potential effects of climate change), natural disasters, crop disease, general increase in farm inputs and costs of production, inventory levels and political and economic conditions, as well as the actions of certain organizations and associations that have historically attempted to influence prices of green coffee through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in cof ff fee commodities can also influence cof fee prices. Because of the ff significance of coffee beans to our operations, combined with our ability to only partially mitigate future price risk through purchasing practices and hedging activities, increases in the cost of high-quality arabica coffee beans could have an adverse impact on our profitability. In addition, if we are not able to purchase sufficient quantities of green cof ff fee due to any of the above factors or to a worldwide or regional shortage, we may not be able to fulfill the demand for our coffee, which could have an adverse impact on our profitability. arabica coffee and also impact ff ff ff ff ff ff ff ff ff yy WW We also purchase significant amounts of dairy products, particularly fluid milk, to support the needs of our company-operated retail stores. Additionally, and although less significant to our operations than cof yy fee or dairy , other commodities, including but ff not limited to tea and those related to food and beverage inputs, such as cocoa, produce, baking ingredients, meats, eggs and energy, as well as the processing of these inputs, are important to our operations. Increases in the cost of dairy products and other commodities, or lack of availability, whether due to supply shortages, delays or interruptions in processing, or otherwise, especially in international markets, could have an adverse impact on our profitability. yy yy Starbucks Corporation 2017 Form 10-K 15 yy • Our financial condition and results of operations are sensitive to, and may be adversely affected by , a number of factors, ff many of which are largely outside our control. Our operating results have been in the past and will continue to be subject to a number of factors, many of which are largely outside our control. Any one or more of the factors listed below or described elsewhere in this risk factors section could adversely impact our business, financial condition and/or results of operations: • increases in real estate costs in certain domestic and international markets; • adverse outcomes of litigation; • severe weather or other natural or man-made disasters affecting a lar ff ge market or several closely located markets that may temporarily but significantly affect our retail business in such markets; and ff • especially in our larger or fast growing markets, labor discord or disruption, geopolitical events, war, terrorism (including incidents targeting us), political instability, boycotts, increasing anti-American sentiment in certain markets, social unrest, and natural disasters, including health pandemics that lead to avoidance of public places or restrictions on public gatherings such as in our stores. yy • Interruption of our supply chain could affect our ability to produce or deliver our products and could negatively impact ff our business and profitability. yy Any material interruption in our supply chain, such as material interruption of roasted coffee supply due to the casualty loss of any of our roasting plants, interruptions in service by our third party logistic service providers or common carriers that ship goods within our distribution channels, trade restrictions, such as increased tariffs or quotas, embar or natural disasters that cause a material disruption in our supply chain could negatively impact our business and our profitability. goes or customs restrictions, ff ff yy Additionally, our food, beverage and other products are sourced from a wide variety of domestic and international business partners in our supply chain operations, and in certain cases are produced or sourced by our licensees directly. We rely on these suppliers and vendors to provide high quality products and to comply with applicable laws. Our ability to find qualified suppliers and vendors who meet our standards and supply products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced from outside the U.S., especially countries or regions with diminished infrastructure, developing or failing economies or experiencing political instability or social unrest, and as we increase our fresh and prepared A A vendor's or supplier's failure to food offerings. For certain products, we may rely on one or very few suppliers or vendors. , or comply with applicable laws is beyond our control. meet our standards, provide products in a timely and efficient manner These issues, especially for those products for which we rely on one or few suppliers or vendors, could negatively impact our business and profitability. WW ff ff ff • Failure to meet market expectations for our financial performance and fluctuations in the stock market as a whole will likely adversely affect the market price and volatility of our stock. ff Failure to meet market expectations going forward, particularly with respect to operating margins, earnings per share, comparable store sales, operating cash flows, and net revenues, will likely result in a decline and/or increased volatility in the market price of our stock. In addition, price and volume fluctuations in the stock market as a whole may affect the market price of our stock in ways that may be unrelated to our financial performance. ff • The loss of key personnel or difficulties recruiting and retaining qualified personnel could adversely impact our business ff and financial results. ff ff Much of our future success depends on the continued availability and service of senior management personnel. The loss of any WW We must continue to recruit, of our executive officers or other key senior management personnel could harm our business. retain and motivate management and other employees sufficiently yy , both to maintain our current business and to execute our strategic initiatives, some of which involve ongoing expansion in business channels outside of our traditional company- operated store model. Our success also depends substantially on the contributions and abilities of our retail store employees whom we rely on to give customers a superior in-store experience and elevate our brand. Accordingly, our performance depends on our ability to recruit and retain high quality employees to work in and manage our stores, both domestically and internationally. Our ability to attract and retain both corporate and retail personnel is also acutely impacted in certain international and domestic markets where the competition for a relatively small number of qualified employees is intense or in markets where large high-tech companies are able to offer more competitive salaries and benefits. If we are unable to recruit, retain and motivate employees sufficiently to maintain our current business and support our projected growth, our business and financial performance may be adversely affected. yy ff ff ff 16 Starbucks Corporation 2017 Form 10-K • Failure to comply with applicable laws and changing legal and regulatory requirements could harm our business and financial results. Our policies and procedures are designed to comply with all applicable laws, accounting and reporting requirements, tax rules and other regulations and requirements, including those imposed by the SEC, NASDAQ, and foreign countries, as well as applicable trade, labor, healthcare, privacy (including the European Union’s GDPR discussed in more detail in this risk factors section), food and beverage, labeling, anti-bribery and corruption and merchandise laws. The complexity of the regulatory environment in which we operate and the related cost of compliance are both increasing due to additional or changing legal and regulatory requirements, our ongoing expansion into new markets and new channels, and the fact that foreign laws occasionally conflict with domestic laws. In addition to potential damage to our reputation and brand, failure by us or our business partners to comply with the various laws and regulations, as well as changes in laws and regulations or the manner in which they are interpreted or applied, may result in litigation, civil and criminal liability, damages, fines and penalties, increased cost of regulatory compliance and restatements of our financial statements and have an adverse impact on our business and financial results. yy Item 1B. Unresolved Staff Comments None. Item 2. Properties The significant properties used by Starbucks in connection with its roasting, manufacturing, warehousing, distribution and corporate administrative operations, serving all segments, are as follows: Location Rancho Cucamonga, CA Washington, DC Augusta, GA Minden, NV (Carson Valley) York, PA Gaston, SC (Sandy Run) Lebanon, TN Auburn, WA Kent, WA Seattle, WA Shanghai, China Amsterdam, Netherlands Samutprakarn, Thailand Approximate Size in Square Feet Purpose 265,000 Manufacturing 130,000 Warehouse and distribution 131,000 Manufacturing 360,000 Roasting and distribution 2,098,000 Roasting, distribution and warehouse 117,000 Roasting and distribution 680,000 Warehouse and distribution 491,000 Warehouse and distribution 510,000 Roasting and distribution 1,241,000 Corporate administrative 121,000 Corporate administrative 97,000 Roasting and distribution 81,000 Warehouse and distribution i f e own most of our roasting facilities and lease the majority of our warehousing and distribution locations. j l f WW W 2017 , Starbucks had 13,275 company-operated stores, worldwide for regional, district and other administrative offi i i ld id f above, we hold inventory at various locations managed by third-party warehouses. h f hi h almost all of which are leased. W l f i i fff f fices, training facilities and storag d di WW d d i l ili i ib i l b k h d i i f ll l di ili i bOctober 1, e also lease space in various locations i As of i e. In addition to the locations listed d l h d h i i l i l i Item 3. Legal Proceedings See Note 15, Commitments and Contingencies, to the consolidated financial statements included in Item 8 of Part II of this 10- K for information regarding certain legal proceedings in which we are involved. Item 4. Mine Safety Disclosures Not applicable. Starbucks Corporation 2017 Form 10-K 17 Item 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity PART II Securities SHAREHOLDER INFORMATION AA MARKET INFORMATION AA AND DIVIDEND POLICY Starbucks common stock is traded on NASDAQ, under the symbol “SBUX.” The following table shows the quarterly high and low sale prices per share of Starbucks common stock as reported by NASDAQ for each quarter during the last two fiscal years and the quarterly cash dividend declared per share of our common stock during the periods indicated: Fiscal 2017: Fourth Quarter Third Quarter Second Quarter First Quarter Fiscal 2016: Fourth Quarter Third Quarter Second Quarter First Quarter High Low Cash Dividends Declared $ $ $ $ 59.66 64.87 59.00 59.54 58.84 61.64 61.79 64.00 $ $ 52.58 57.38 53.81 50.84 52.90 54.01 52.63 54.81 0.30 0.25 0.25 0.25 0.25 0.20 0.20 0.20 As of November 10, 2017, we had approximately 18,100 shareholders of record. This does not include persons whose stock is in nominee or “street name” accounts through brokers. Future decisions to pay cash dividends continue to be at the discretion of the Board of Directors and will be dependent on our operating performance, financial condition, capital expenditure requirements and other factors that the Board of Directors considers relevant. Y ISSUER PURCHASES OF EQUITY F SECURITIES The following table provides information regarding repurchases of our common stock during the quarter ended October 1, 2017: Period(1) July 3, 2017 — July 30, 2017 July 31, 2017 — August 27, 2017 August 28, 2017 — October 1, 2017 Total Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(3) 2,168,233 4,804,970 8,116,314 15,089,517 $ $ 58.03 53.87 54.41 54.76 2,168,233 4,804,970 8,116,314 15,089,517 93,238,695 88,433,725 80,317,411 (1) Monthly information is presented by reference to our fiscal months during the fourth quarter of fiscal 2017. (2) Share repurchases are conducted under our ongoing share repurchase program announced in September 2001, which has no expiration date. (3) This column includes the total remaining number of shares authorized for repurchase under the Company's ongoing share repurchase program. Shares under our ongoing share repurchase program may be repurchased in open market transactions, including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, or through privately negotiated transactions. The timing, manner, price and amount of repurchases will be 18 Starbucks Corporation 2017 Form 10-K determined at the Company's discretion, and the share repurchase program may be suspended, terminated or modified at any time for any reason. Performance Comparison Graph The following graph depicts the total return to shareholders from September 30, 2012 through October 1, 2017, relative to the performance of the Standard & Poor’s 500 Index, the NASDAQ Composite Index and the Standard & Poor’s 500 Consumer Discretionary Sector, a peer group that includes Starbucks. All indices shown in the graph have been reset to a base of 100 as of September 30, 2012, and assume an investment of $100 on that date and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance. Sep 30, 2012 Sep 29, 2013 Sep 28, 2014 Sep 27, 2015 Oct 2, 2016 Oct 1, 2017 Starbucks Corporation S&P 500 NASDAQ Composite S&P Consumer Discretionary $ $ 100.00 100.00 100.00 100.00 $ 154.67 119.34 123.38 131.84 $ 152.47 142.89 148.79 147.36 $ 238.48 142.02 154.52 166.78 $ 225.70 163.93 178.82 182.85 227.92 194.44 220.25 209.40 Starbucks Corporation 2017 Form 10-K 19 Item 6. Selected Financial Data The following selected financial data is derived from the consolidated financial statements. All per-share data has been retroactively adjusted to give effect to the two-for Policies, included in Item 8 of Part II of this 10-K. The data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and the consolidated financial statements and notes. -one stock split discussed in Note 1, Summary of Significant Accounting ff Financial Information (in millions, except per shar r e data): r As of and for the Fiscal YearYY Ended r (1) Oct 1, 2017 (52 Wks) Oct 2, 2016 (53 Wks) Sep 27, 2015 (52 Wks) Sep 28, 2014 (52 Wks) Sep 29, 2013 (52 Wks) Net revenues: Company-operated stores Licensed stores CPG, foodservice and other Total net revenues Operating income/(loss)(2) Net earnings including noncontrolling interests(2) Net earnings/(loss) attributable to noncontrolling interests Net earnings attributable to Starbucks(2) EPS — diluted(2) Cash dividends declared per share $ 17,650.7 $ 16,844.1 $ 15,197.3 $ 12,977.9 $ 11,793.2 2,355.0 2,381.1 2,154.2 2,317.6 1,861.9 2,103.5 1,588.6 1,881.3 1,360.5 1,713.1 $ 22,386.8 $ 21,315.9 $ 19,162.7 $ 16,447.8 $ 4,134.7 $ 4,171.9 $ 3,601.0 $ 3,081.1 2,884.9 2,818.9 2,759.3 2,067.7 $ 14,866.8 (325.4) 8.8 $ 0.2 1.2 1.9 2,884.7 2,817.7 2,757.4 1.97 1.050 1.90 0.850 1.82 0.680 (0.4) 2,068.1 1.35 0.550 607.8 0.5 8.3 0.01 0.445 2,908.3 Net cash provided by operating activities 4,174.3 4,575.1 3,749.1 Capital expenditures (additions to property, plant and equipment) Balance Sheet 1,519.4 1,440.3 1,303.7 1,160.9 1,151.2 TT Total assets (3) $ 14,365.6 $ 14,312.5 $ 12,404.1 $ 10,745.0 $ 11,509.8 Long-term debt (including current portion) Shareholders’ equity 3,932.6 5,450.1 3,585.2 5,884.0 2,335.3 5,818.0 2,041.3 5,272.0 1,293.2 4,480.2 (1) Our fiscal year ends on the Sunday closest to September 30. The fiscal year ended on October 2, 2016 included 53 weeks, with the 53rd week falling in our fourth fiscal quarter . d (2) Fiscal 2013 results include a pretax charge of $2,784.1 million resulting from the conclusion of our arbitration with Kraft Foods Global, Inc. The impact of this charge to net earnings attributable to Starbucks and diluted EPS, net of the related tax benefit, was $1,713.1 million and $1.12 per share, respectively. (3) Total assets for fiscal 2013 through fiscal 2016 have been adjusted for the adoption of new accounting guidance related to TT the reclassification of debt issuance costs as discussed in Note 1, Summary of Significant Accounting Policies. 20 Starbucks Corporation 2017 Form 10-K Comparable Store Sales: Fiscal Year Ended Percentage change in comparable store sales(1) Americas Sales growth Change in transactions Change in ticket China/Asia Pacific(2) Sales growth Change in transactions Change in ticket EMEA(3) Sales growth Change in transactions Change in ticket Consolidated Sales growth Change in transactions Change in ticket Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013 3 % — % 4 % 3 % 1 % 1 % 1 % (1)% 1 % 3 % — % 3 % 6% 1% 5% 3% 1% 2% —% 1% —% 5% 1% 4% 7% 3% 4% 9% 8% 1% 4% 2% 1% 7% 3% 4% 6% 2% 3% 7% 6% —% 5% 3% 2% 6% 3% 3% 7 % 5 % 2 % 9 % 7 % 2 % — % 2 % (2)% 7 % 5 % 2 % (1) Includes only Starbucks® company-operated stores open 13 months or longer. Comparable store sales exclude the effect of fluctuations in foreign currency exchange rates. For fiscal year 2016, comparable store sales percentages were calculated excluding the 53rd week. ff d (2) Beginning in December of fiscal 2016, comparable store sales include the results of the 1,009 company-operated stores acquired as part of the acquisition of Starbucks Japan in the first quarter of fiscal 2015. (3) Company-operated stores represent 17% of the EMEA segment store portfolio as of October 1, 2017. A Starbucks Corporation 2017 Form 10-K 21 Store Count Data: As of and for the Fiscal Year Ended Net stores opened/(closed) and transferred during the year: Americas(1) Company-operated stores Licensed stores China/Asia Pacific (2) Company-operated stores Licensed stores EMEA(3) Company-operated stores Licensed stores All Other Segments (4) Company-operated stores Licensed stores Total Stores open at year end: Americas (1) Company-operated stores Licensed stores China/Asia Pacific(2) Company-operated stores Licensed stores EMEA(3) Company-operated stores Licensed stores All Other Segments(4) Company-operated stores Licensed stores Total Oct 1, 2017 (52 Wks) Oct 2, 2016 (53 Wks) Sep 27, 2015 (52 Wks) Sep 28, 2014 (52 Wks) Sep 29, 2013 (52 Wks) 394 558 259 777 (21) 353 (68) 2 2,254 9,413 7,146 3,070 4,409 502 2,472 290 37 348 456 359 622 (214) 494 (17) (6) 2,042 9,019 6,588 2,811 3,632 523 2,119 358 35 276 336 1,320 (482) (80) 302 6 (1) 1,677 8,671 6,132 2,452 3,010 737 1,625 375 41 317 381 250 492 (9) 180 276 404 239 349 (29) 129 12 (24) 1,599 343 (10) 1,701 8,395 5,796 1,132 3,492 817 1,323 369 42 8,078 5,415 882 3,000 826 1,143 357 66 27,339 25,085 23,043 21,366 19,767 (1) Americas store data includes the closure of 132 TarTT get Canada licensed stores in the second quarter of fiscal 2015. (2) China/Asia Pacific store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the fourth quarter of fiscal 2014. China/Asia Pacific store data also includes the transfer of 1,009 Japan stores from licensed stores to company-operated as a result of the acquisition of Starbucks Japan in the first quarter of fiscal 2015 and the transfer of 133 Singapore stores from company-operated stores to licensed stores in the fourth quarter of fiscal 2017. A (3) EMEA store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the second and fourth quarters of fiscal 2014. EMEA store data also includes the transfer of 144 Germany company-operated retail stores to licensed stores as a result of the sale to AmRest Holdings SE in the third quarter of fiscal 2016. A (4) All Others Segments data includes 337 Teavana of 64 Teavana-branded stores in fiscal 2017. TT TT ™ stores acquired in the second quarter of fiscal 2013 and the net closure 22 Starbucks Corporation 2017 Form 10-K 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. otherwise noted. All references to store counts, including data for new store openings, are reported net of related store closures, unless d Financial Highlights • • • • • • • TT Total net revenues increased $412.4 million from extra week of fiscal 2016, net revenues grew 7%. 5% to $22.4 billion in fiscal 2017 compared to $21.3 billion in fiscal 2016. Excluding 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. ff TT 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. ff 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 WW billion in fiscal 2016. $3.5 billion to our shareholders in fiscal 2017 through share repurchases and dividends compared to $3.2 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. ff ff 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. our premium food offerings coupled with innovation across our cof ff fee 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 ff food, and the absence of the 53rd week. These were partially offset by sales leverage. The success of ff ff 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. WW ff Starbucks Corporation 2017 Form 10-K 23 yy revenues declined $1 We continue to execute on our strategy of repositioning the EMEA A WW this strategy, EMEA A 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. 11 million to $1.0 billion, or 10%, primarily driven by the absence of revenue related segment to a predominantly licensed model. As a result of ff ff 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. 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. When excluding the revenue of the ff ff ff Fiscal 2018 — The View VV Ahead TT Turning to fiscal shareholders. These results are expected to be driven by our 6 operational priorities, which include: 2018, we expect continued growth through thoughtful long-term investments that create value and reward • • • • • • 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 TT Elevate the Starbucks Experience through Siren Retail Gain Share of At-Home Coffeeff 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. WW 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. TT TT WW TT TT 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. 24 Starbucks Corporation 2017 Form 10-K F RESULTS OF LL AA OPERA TIONS — FISCAL 2017 COMPARED PP TO FISCAL 2016 Consolidated results of operations (in millions): Revenues Fiscal Year Ended Net revenues: Company-operated stores Licensed stores CPG, foodservice and other Total net revenues Oct 1, 2017 Oct 2, 2016 (52 Weeks Ended) (53 Weeks Ended) % Change $ $ 17,650.7 $ 2,355.0 2,381.1 22,386.8 $ 16,844.1 2,154.2 2,317.6 21,315.9 4.8 % 9.3 2.7 5.0% $1.1 billion, or 5%, over fiscal 2016, primarily driven by increased revenues from company- Total net revenues increased TT 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). ff 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 ff 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 coffeeff ($32 million), foodservice ($30 million) and premium single-serve products ($23 million). Increased sales were partially offset ff by the absence of the 53rd week ($47 million) and an unfavorable revenue deduction adjustment pertaining to periods prior to fiscal 2017 ($13 million). g Operating Expenses p p Fiscal Year Ended Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Restructuring and impairments Total operating expenses Income from equity investees Operating income Store operating expenses as a % of related revenues Other operating expenses as a % of non-company- operated store revenues Oct 1, 2017 Oct 2, 2016 (52 Weeks Ended) (53 Weeks Ended) $ 9,038.2 $ 6,493.3 553.8 1,011.4 1,393.3 153.5 18,643.5 391.4 4,134.7 $ $ 8,511.1 6,064.3 545.4 980.8 1,360.6 — 17,462.2 318.2 4,171.9 Oct 1, 2017 Oct 2, 2016 As a % of TotalTT Net Revenues 40.4 % 29.0 2.5 4.5 6.2 0.7 83.3 1.7 18.5% 36.8 % 11.7% 39.9 % 28.4 2.6 4.6 6.4 — 81.9 1.5 19.6% 36.0 % 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). ff Starbucks Corporation 2017 Form 10-K 25 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). ff 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 ff 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 WW 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. TT yy 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. P ff 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 p Fiscal Year Ended Operating income Interest income and other, net Interest expense Earnings before income taxes Income tax expense Net earnings including noncontrolling interests Net earnings attributable to noncontrolling interests Net earnings attributable to Starbucks Effective tax rate including noncontrolling interests $ Oct 1, 2017 Oct 2, 2016 (52 Weeks Ended) (53 Weeks Ended) $ 4,134.7 $ 275.3 (92.5) 4,317.5 1,432.6 2,884.9 0.2 2,884.7 $ 4,171.9 108.0 (81.3) 4,198.6 1,379.7 2,818.9 1.2 2,817.7 Oct 1, 2017 Oct 2, 2016 As a % of TotalTT Net Revenues 18.5 % 19.6 % 1.2 (0.4) 19.3 6.4 12.9 — 12.9% 33.2 % 0.5 (0.4) 19.7 6.5 13.2 — 13.2% 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. ff ff 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 lar gain on the sale of our Singapore retail operations in the fourth quarter of fiscal 2017 (approximately 70 basis points). gely non-taxable ff ff 26 Starbucks Corporation 2017 Form 10-K Segment Information Results of operations by segment (in millions): Americas Fiscal Year Ended Net revenues: Company-operated stores Licensed stores Foodservice and other Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Restructuring and impairments Total operating expenses Operating income Store operating expenses as a % of related revenues Other operating expenses as a % of non-company- poperated store revenues Revenues Oct 1, 2017 Oct 2, 2016 (52 Weeks Ended) (53 Weeks Ended) $ $ 13,996.4 1,617.3 39.0 15,652.7 5,720.3 5,320.2 128.5 615.0 201.4 4.1 11,989.5 3,663.2 $ $ 13,247.4 1,518.5 29.5 14,795.4 5,271.9 4,909.3 96.0 590.1 186.1 — 11,053.4 3,742.0 Oct 1, 2017 Oct 2, 2016 As a % of Americas TT Total Net Revenues 89.4 % 10.3 0.2 100.0 36.5 34.0 0.8 3.9 1.3 —% 76.6 23.4% 38.0 % 7.8 % 89.5 % 10.3 0.2 100.0 35.6 33.2 0.6 4.0 1.3 —% 74.7 25.3% 37.1 % 6.2 % 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) ff 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). ff g Operating Expenses p p 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 ff 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 TarTT get 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. ff 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. Starbucks Corporation 2017 Form 10-K 27 China/Asia Pacific Fiscal Year Ended Net revenues: Company-operated stores Licensed stores Foodservice and other Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Income from equity investees Operating income Store operating expenses as a % of related revenues Other operating expenses as a % of non-company- operated store revenues Revenues Oct 1, 2017 Oct 2, 2016 (52 Weeks Ended) (53 Weeks Ended) $ $ $ 2,906.0 327.4 6.8 3,240.2 1,393.9 845.5 74.6 202.2 156.0 2,672.2 197.0 765.0 $ 2,640.4 292.3 6.1 2,938.8 1,296.7 779.4 70.3 180.6 130.3 2,457.3 150.1 631.6 Oct 1, 2017 Oct 2, 2016 As a % of China/Asia Pacific Total Net Revenues 89.7 % 10.1 0.2 100.0 43.0 26.1 2.3 6.2 4.8 82.5 6.1 23.6% 29.1 % 22.3 % 89.8 % 9.9 0.2 100.0 44.1 26.5 2.4 6.1 4.4 83.6 5.1 21.5% 29.5 % 23.6 % 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). ff i d Licensed store revenues increased $ 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) ff $35 million, primarily driven by increased product sales to and royalty revenues from illi d p i g Operating Expenses p p i Cost of sales including occupancy costs as a percentage of total net revenues decrea 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 operating expenses as a percentage of total net revenues decrea 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). i h 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). d f l 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. 28 Starbucks Corporation 2017 Form 10-K EMEA Fiscal Year Ended Net revenues: Company-operated stores Licensed stores Foodservice Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Restructuring and impairments Total operating expenses Income from equity investees Operating income Store operating expenses as a % of related revenues Other operating expenses as a % of non-company- operated store revenues Revenues Oct 1, 2017 Oct 2, 2016 (52 Weeks Ended) (53 Weeks Ended) Oct 1, 2017 Oct 2, 2016 As a % of EMEA Total Net Revenues $ $ 551.0 407.7 55.0 1,013.7 533.5 214.1 59.1 31.3 41.7 17.9 897.6 — 116.1 $ $ 732.0 339.5 53.4 1,124.9 565.0 260.6 57.0 40.8 51.4 — 974.8 1.5 151.6 54.4 % 40.2 5.4 100.0 52.6 21.1 5.8 3.1 4.1 1.8 88.5 — 11.5% 38.9 % 65.1 % 30.2 4.7 100.0 50.2 23.2 5.1 3.6 4.6 — 86.7 0.1 13.5% 35.6 % 12.8 % 14.5 % A 2017 decreased $111 million, or 10%, over fiscal 2016. The decrease was primarily due to a EMEA total net revenues for fiscal 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). iLicensed 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) ff and the absence of the 53rd week ($6 million). g Operating Expenses p p i l i f l di 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). f l i i 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). ff f l 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 Starbucks Corporation 2017 Form 10-K 29 efforts for our Switzerland retail business are not expected to fully recover the reporting unit's carrying value given the ff 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 Net revenues: CPG Foodservice Total net revenues Cost of sales Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Income from equity investees Operating income Oct 1, 2017 Oct 2, 2016 (52 Weeks Ended) (53 Weeks Ended) $ $ $ 1,543.7 464.9 2,008.6 1,074.3 222.2 2.2 10.9 1,309.6 194.4 893.4 $ 1,488.2 444.3 1,932.5 1,042.6 228.5 2.8 17.9 1,291.8 166.6 807.3 Oct 1, 2017 Oct 2, 2016 As a % of Channel Development Total Net Revenues 76.9 % 23.1 100.0 53.5 11.1 0.1 0.5 65.2 9.7 44.5% 77.0 % 23.0 100.0 54.0 11.8 0.1 0.9 66.8 8.6 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). ff ff g Operating Expenses p p 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). ff ff 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 Coffeeff 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. 30 Starbucks Corporation 2017 Form 10-K All Other Segments Fiscal Year Ended Net revenues: Company-operated stores Licensed stores CPG, foodservice and other Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Restructuring and impairments Total operating expenses Operating loss Oct 1, 2017 Oct 2, 2016 (52 Weeks Ended) (53 Weeks Ended) % Change $ $ $ 197.3 2.6 271.7 471.6 308.0 113.5 68.2 10.1 14.6 131.5 645.9 (174.3) $ 224.3 3.9 296.1 524.3 316.5 115.0 91.4 13.3 26.5 — 562.7 (38.4) (12.0)% (33.3) (8.2) (10.1) (2.7) (1.3) (25.4) (24.1) (44.9) nm 14.8 353.9 % TT All Other Segments primarily includes Teavana-branded stores, Seattle’ 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 ® stores. We recorded $69 million for the partial impairment of goodwill and $60 and focus on Teavana™ tea within Starbucks million in restructuring-related costs, including asset impairments, costs associated with the early closure of stores and their related obligations, and severance. s Best Coffee, as well as certain developing businesses WW TT TT ff F RESULTS OF LL AA OPERA TIONS — FISCAL 2016 COMPARED PP TO FISCAL 2015 Consolidated results of operations (in millions): Revenues Fiscal Year Ended Net revenues: Company-operated stores Licensed stores CPG, foodservice and other Total net revenues Oct 2, 2016 Sep 27, 2015 (53 Weeks Ended) (52 Weeks Ended) % Change $ $ 16,844.1 2,154.2 2,317.6 21,315.9 $ $ 15,197.3 1,861.9 2,103.5 19,162.7 10.8 % 15.7 10.2 11.2% 1%, over fiscal 2015, primarily due to increased revenues from company-operated Total net revenues increased $2.2 billion, or 1 TT 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). ff 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 ff Starbucks Corporation 2017 Form 10-K 31 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 ff U.S. packaged coffee ($32 million). g Operating Expenses p p Fiscal Year Ended Oct 2, 2016 Sep 27, 2015 (53 Weeks Ended) (52 Weeks Ended) Cost of sales including occupancy costs $ 8,511.1 $ Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Income from equity investees Operating income Store operating expenses as a % of related revenues Other operating expenses as a % of non-company- operated store revenues 6,064.3 545.4 980.8 1,360.6 17,462.2 318.2 4,171.9 $ $ 7,787.5 5,411.1 522.4 893.9 1,196.7 15,811.6 249.9 3,601.0 Oct 2, 2016 Sep 27, 2015 As a % of TotalTT Net Revenues 39.9 % 28.4 2.6 4.6 6.4 81.9 1.5 19.6% 36.0 % 12.2% 40.6 % 28.2 2.7 4.7 6.2 82.5 1.3 18.8% 35.6 % 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). ff 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 TarTT get 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. ff The combination of these changes resulted in an overall increase in operating margin of 80 basis points over fiscal 2015. 32 Starbucks Corporation 2017 Form 10-K Other Income and Expenses p Fiscal Year Ended Oct 2, 2016 Sep 27, 2015 (53 Weeks Ended) (52 Weeks Ended) Operating income $ 4,171.9 $ Gain resulting from acquisition of joint venture Loss on extinguishment of debt Interest income and other, net Interest expense Earnings before income taxes Income tax expense Net earnings including noncontrolling interests Net earnings attributable to noncontrolling interests Net earnings attributable to Starbucks Effective tax rate including noncontrolling interests $ — — 108.0 (81.3) 4,198.6 1,379.7 2,818.9 1.2 2,817.7 $ 3,601.0 390.6 (61.1) 43.0 (70.5) 3,903.0 1,143.7 2,759.3 1.9 2,757.4 Oct 2, 2016 Sep 27, 2015 As a % of TotalTT Net Revenues 19.6 % 18.8 % — — 0.5 (0.4) 19.7 6.5 13.2 — 13.2% 32.9 % 2.0 (0.3) 0.2 (0.4) 20.4 6.0 14.4 — 14.4% 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. ff 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. ff 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. The increase in the rate for fiscal 2016 was Starbucks Corporation 2017 Form 10-K 33 Segment Information Results of operations by segment (in millions): Americas Fiscal Year Ended Net revenues: Company-operated stores Licensed stores Foodservice and other Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Operating income Store operating expenses as a % of related revenues Other operating expenses as a % of non-company- operated store revenues Revenues Oct 2, 2016 Sep 27, 2015 (53 Weeks Ended) (52 Weeks Ended) $ $ $ 13,247.4 1,518.5 29.5 14,795.4 5,271.9 4,909.3 96.0 590.1 186.1 11,925.6 1,334.4 33.4 13,293.4 4,845.0 4,387.9 122.8 522.3 192.1 11,053.4 3,742.0 $ 10,070.1 3,223.3 Oct 2, 2016 Sep 27, 2015 As a % of Americas TT Total Net Revenues 89.5 % 10.3 0.2 100.0 35.6 33.2 0.6 4.0 1.3 74.7 25.3% 37.1 % 6.2 % 89.7 % 10.0 0.3 100.0 36.4 33.0 0.9 3.9 1.4 75.8 24.2% 36.8 % 9.0 % 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. ff 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). g Operating Expenses p p 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). ff 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 TarTT get 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. 34 Starbucks Corporation 2017 Form 10-K China/Asia Pacific Fiscal Year Ended Net revenues: Company-operated stores Licensed stores Foodservice and other Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Income from equity investees Operating income Store operating expenses as a % of related revenues Other operating expenses as a % of non-company- poperated store revenues Revenues Oct 2, 2016 Sep 27, 2015 (53 Weeks Ended) (52 Weeks Ended) $ $ $ 2,640.4 292.3 6.1 2,938.8 1,296.7 779.4 70.3 180.6 130.3 2,457.3 150.1 631.6 $ 2,127.3 264.4 4.2 2,395.9 1,071.5 609.8 62.2 150.7 120.8 2,015.0 119.6 500.5 Oct 2, 2016 Sep 27, 2015 As a % of China/Asia Pacific Total Net Revenues 89.8 % 9.9 0.2 100.0 44.1 26.5 2.4 6.1 4.4 83.6 5.1 21.5% 29.5 % 23.6 % 88.8 % 11.0 0.2 100.0 44.7 25.5 2.6 6.3 5.0 84.1 5.0 20.9% 28.7 % 23.2 % 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). ff g Operating Expenses p p 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). ff 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). ff 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, Starbucks Corporation 2017 Form 10-K 35 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). ff The combination of these changes resulted in an overall increase in operating margin of 60 basis points over fiscal 2015. EMEA Fiscal Year Ended Net revenues: Company-operated stores Licensed stores Foodservice Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Income from equity investees Operating income Store operating expenses as a % of related revenues Other operating expenses as a % of non-company- operated store revenues Revenues Oct 2, 2016 Sep 27, 2015 (53 Weeks Ended) (52 Weeks Ended) $ $ $ 732.0 339.5 53.4 1,124.9 565.0 260.6 57.0 40.8 51.4 974.8 1.5 151.6 $ 911.2 257.2 48.3 1,216.7 582.5 308.7 51.8 52.0 56.6 1,051.6 3.1 168.2 Oct 2, 2016 Sep 27, 2015 As a % of EMEA Total Net Revenues 65.1 % 30.2 4.7 100.0 50.2 23.2 5.1 3.6 4.6 86.7 0.1 13.5% 35.6 % 14.5 % 74.9 % 21.1 4.0 100.0 47.9 25.4 4.3 4.3 4.7 86.4 0.3 13.8% 33.9 % 17.0 % A EMEA total net revenues for fiscal 2016 decreased $92 million, or 8%. 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). The decrease was primarily due to a decline in ff 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). ff g Operating Expenses p p 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). 36 Starbucks Corporation 2017 Form 10-K 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 ff (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 Net revenues: CPG Foodservice Total net revenues Cost of sales Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Income from equity investees Operating income Revenues Oct 2, 2016 Sep 27, 2015 (53 Weeks Ended) (52 Weeks Ended) Oct 2, 2016 Sep 27, 2015 As a % of Channel Development Total Net Revenues $ $ $ 1,488.2 444.3 1,932.5 1,042.6 228.5 2.8 17.9 1,291.8 166.6 807.3 $ 1,329.0 401.9 1,730.9 974.8 210.5 2.7 16.2 1,204.2 127.2 653.9 77.0 % 23.0 100.0 54.0 11.8 0.1 0.9 66.8 8.6 41.8% 76.8 % 23.2 100.0 56.3 12.2 0.2 0.9 69.6 7.3 37.8% 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. ff g Operating Expenses p p 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). ff 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 bottled Frappuccino® beverages and new product launches, partially offset by increased marketing costs (approximately 150 basis points). ® and ff ff The combination of these changes contributed to an overall increase in operating margin of 400 basis points over fiscal 2015. Starbucks Corporation 2017 Form 10-K 37 All Other Segments Fiscal Year Ended Net revenues: Company-operated stores Licensed stores CPG, foodservice and other Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Operating loss Oct 2, 2016 Sep 27, 2015 (53 Weeks Ended) (52 Weeks Ended) % Change $ $ $ 224.3 3.9 296.1 524.3 316.5 115.0 91.4 13.3 26.5 562.7 (38.4) $ 233.2 5.9 286.7 525.8 316.5 104.7 76.5 16.3 36.6 550.6 (24.8) (3.8)% (33.9)% 3.3 (0.3) — 9.8 19.5 (18.4) (27.6) 2.2 54.8 % All Other Segments primarily includes Teavana, Seattle’ businesses such as Siren Retail. TT s Best Coffee, Evolution Fresh, as well as certain developing ff FINANCIAL CONDITION, LIQUIDITY L L AND CAPITALTT 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 WW 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. y Borrowing capacity g p 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. yy WW $150 million may be used for issuances of letters of credit, is currently set to mature on The 2018 credit facility, of which 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. yy WW 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 38 Starbucks Corporation 2017 Form 10-K 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. 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 of ff fering to enhance our sustainability programs around cof fee supply ff 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. The 7- WW yy ff 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 WW 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. WW WW 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. WW ff We consider the majority of undistributed earnings of our foreign subsidiaries and equity investees as of October 1, 2017 to be WW indefinitely reinvested, and, accordingly, no U.S. income and foreign withholding taxes have been provided on such earnings. , in the WW We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs; however 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. WW yy ff 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 billion and $2.0 billion, respectively, under our ongoing share repurchase program. remaining shares authorized for repurchase under our ongoing share repurchase program totaled 80.3 million. yy At October 1, 2017, the number of yy $2.1 Starbucks Corporation 2017 Form 10-K 39 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. TT Cash Flows Cash provided by operating activities was primarily due to the timing of our cash payments for income taxes. d $4.2 billion for fiscal 2017, compared to $4.6 billion for fiscal 2016. The change was d 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 ff the remaining 50% ownership share of our East China joint venture. d 2017 totaled $3.0 billion, compared to $1.8 billion for fiscal 2016. The change was Cash used by financing activities for fiscal 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 g 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): ff (1) g Contractual Obligations Operating lease obligations(2) Financing lease obligations Debt obligations Principal payments Interest payments Purchase obligations(3) Other obligations(4) Total Payments Due by Period Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years $ 8,613.5 $ 1,213.1 $ 2,210.2 $ 1,875.0 $ 3,315.2 59.1 3,955.3 868.9 1,310.1 134.7 4.1 — 83.6 848.1 20.3 8.2 350.0 185.6 380.1 28.1 7.9 38.9 1,250.0 172.9 73.6 18.8 2,355.3 426.8 8.3 67.5 $ 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 obligations. ff 91% of total purchase (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 ff 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, Y AVAA AILABILITY VV AND GENERAL RISK CONDITIONS L Commodity price risk represents Starbucks primary market risk, generated by our purchases of green coffee and dairy products, arabica coffee and related products and risk arises from the price WW among other items. We purchase, roast and sell high-quality volatility of green coffee. In addition to cof ff fee, we also purchase significant amounts of dairy products to support the needs of ff 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. ff A ff ff 40 Starbucks Corporation 2017 Form 10-K FINANCIAL RISK MANAGEMENT L WW 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. WW yy 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. ff Commodity Price Risk fee, dairy products, diesel, cocoa, sugar and other commodities, that are used in We purchase commodity inputs, primarily cof ff WW our operations and are subject to price fluctuations that impact our financial results. We use a combination of pricing features WW 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. ff 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. TT 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): Foreign currency hedges $ 23 $ (23) $ 119 $ (119) 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 Equity Security Price Risk We have minimal exposure to price fluctuations on equity mutual funds and equity exchange-traded funds within our trading WW 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. TT We performed a sensitivity analysis based on a 10% change in the underlying equity prices of our investments as of WW 2017 and determined that such a change would not have a significant impact on the fair value of these instruments. October 1, Starbucks Corporation 2017 Form 10-K 41 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 WW 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. yy 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): 2018 notes 2021 notes 2022 notes 2023 notes(1) 2024 notes 2026 notes 2045 notes Stated Interest Rate Fair Value 100 Basis Point Increase in Underlying Rate 100 Basis Point Decrease in Underlying Rate Change in Fair Value 2.000% $ 2.100% $ 2.700% $ 3.850% $ 0.372% $ 2.450% $ 4.300% $ 352 751 508 806 760 481 381 $ $ $ $ $ $ $ (4) $ (24) $ (22) $ — $ (47) $ (37) $ (63) $ 4 24 22 — 47 37 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 rr 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 WW -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. WW AA F APPLICATION OF AA 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 fecting the application of those estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties af ff ff ferent conditions or using dif ferent assumptions. ff policies may result in materially different amounts being reported under dif ff ff ff 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 WW following policies involve a higher degree of judgment and/or complexity. WW 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. ww 42 Starbucks Corporation 2017 Form 10-K r Property, Plant and Equipment and Other yy Finite-Lived Assets We evaluate property yy , plant and equipment and other finite-lived assets for impairment when facts and circumstances indicate WW 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. r 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. ff 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. TT Goodwill and Indefinite-Lived Intangible Assets We evaluate goodwill and indefinite-lived intangible assets for impairment annually during our third fiscal quarter , or more WW 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 ff 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 Starbucks Corporation 2017 Form 10-K 43 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. ff 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. TT Income Taxes TT We recognize deferred tax assets and liabilities based on the dif ff ferences between the financial statement carrying amounts and WW 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. WW 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 ef ff fective tax rate in the future; however ff from recently enacted tax laws to be material to the consolidated financial statements. , we do not expect changes ff 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). WW 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. WW TT ff We have generated income in certain foreign jurisdictions that has not been subject to U.S. income taxes. WW 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 yy , is dependent on circumstances existing if and when remittance occurs. WW We intend to reinvest yy 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 , and we may be exposed to losses or gains judgments and estimates discussed herein are reasonable, actual results could differ 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 ef ff fective income tax rate in a given financial statement period could be materially affected. TT yy ff ff 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. 44 Starbucks Corporation 2017 Form 10-K Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated by reference to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Commodity Prices, Availability and General Risk Conditions” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Risk Management” in Item 7 of this Report. AA Starbucks Corporation 2017 Form 10-K 45 Item 8. Financial Statements and Supplementary Data TT CONSOLIDATED ST AA STARBUCKS CORPORA AA TION F ATT TEMENTS OF AA EARNINGS (in millions, except per share data) rr Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ 17,650.7 $ 16,844.1 $ 15,197.3 Fiscal Year Ended Net revenues: Company-operated stores Licensed stores CPG, foodservice and other Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Restructuring and impairments Total operating expenses Income from equity investees Operating income Gain resulting from acquisition of joint venture Loss on extinguishment of debt Interest income and other, net Interest expense Earnings before income taxes Income tax expense Net earnings including noncontrolling interests Net earnings attributable to noncontrolling interests Net earnings attributable to Starbucks Earnings per share — basic Earnings per share — diluted Weighted average shares outstanding: Basic Diluted $ $ $ 2,355.0 2,381.1 22,386.8 9,038.2 6,493.3 553.8 1,011.4 1,393.3 153.5 18,643.5 391.4 4,134.7 — — 275.3 (92.5) 4,317.5 1,432.6 2,884.9 0.2 2,884.7 1.99 1.97 1,449.5 1,461.5 $ $ $ 2,154.2 2,317.6 21,315.9 8,511.1 6,064.3 545.4 980.8 1,360.6 — 17,462.2 318.2 4,171.9 — — 108.0 (81.3) 4,198.6 1,379.7 2,818.9 1.2 2,817.7 1.91 1.90 1,471.6 1,486.7 $ $ $ 1,861.9 2,103.5 19,162.7 7,787.5 5,411.1 522.4 893.9 1,196.7 — 15,811.6 249.9 3,601.0 390.6 (61.1) 43.0 (70.5) 3,903.0 1,143.7 2,759.3 1.9 2,757.4 1.84 1.82 1,495.9 1,513.4 See Notes to Consolidated Financial Statements. 46 Starbucks Corporation 2017 Form 10-K TT F ATT TEMENTS OF CONSOLIDATED ST AA STARBUCKS CORPORA AA AA TION COMPREHENSIVE INCOME (in millions) Fiscal Year Ended Net earnings including noncontrolling interests Other comprehensive income/(loss), net of tax: Unrealized holding gains/(losses) on available-for-sale securities Tax (expense)/benefit Unrealized gains/(losses) on cash flow hedging instruments Tax (expense)/benefit Unrealized gains/(losses) on net investment hedging instruments Tax (expense)/benefit Translation adjustment and other Tax (expense)/benefit Reclassification adjustment for net (gains)/losses realized in net earnings for available-for-sale securities, hedging instruments, and translation adjustment Tax expense/(benefit) Other comprehensive income/(loss) Comprehensive income including noncontrolling interests Comprehensive income/(loss) attributable to noncontrolling interests Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ 2,884.9 $ 2,818.9 $ 2,759.3 (9.5) 2.9 53.2 (12.6) 20.1 (7.4) (38.3) (2.4) (67.2) 14.0 (47.2) 2,837.7 0.2 3.5 (1.3) (109.6) 27.5 — — 85.5 19.0 78.2 (11.8) 91.0 2,909.9 1.2 1.4 (0.5) 47.6 (16.8) 4.3 (1.6) (222.7) 6.0 (65.9) 23.5 (224.7) 2,534.6 (29.2) 2,563.8 Comprehensive income attributable to Starbucks $ 2,837.5 $ 2,908.7 $ See Notes to Consolidated Financial Statements. Starbucks Corporation 2017 Form 10-K 47 AA STARBUCKS CORPORA TT TION CONSOLIDATED BALANCE SHEETS (in millions, except per share data) AA rr ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Total current assets Long-term investments Equity and cost investments Property, plant and equipment, net Deferred income taxes, net Other long-term assets Other intangible assets Goodwill TOTAL ASSETS LIABILITIES AND EQUITY Current liabilities: Accounts payable Accrued liabilities Insurance reserves Stored value card liability Current portion of long-term debt Total current liabilities Long-term debt Other long-term liabilities Total liabilities Shareholders’ equity: Common stock ($0.001 par value) — authorized, 2,400.0 shares; issued and outstanding, 1,431.6 and 1,460.5 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Noncontrolling interests Total equity TOTAL LIABILITIES AND EQUITY Oct 1, 2017 Oct 2, 2016 $ $ $ $ 2,462.3 228.6 870.4 1,364.0 358.1 5,283.4 542.3 481.6 4,919.5 795.4 362.8 441.4 1,539.2 14,365.6 782.5 1,934.5 215.2 1,288.5 — 4,220.7 3,932.6 755.3 8,908.6 1.4 41.1 5,563.2 (155.6) 5,450.1 6.9 5,457.0 14,365.6 $ $ $ $ 2,128.8 134.4 768.8 1,378.5 347.4 4,757.9 1,141.7 354.5 4,533.8 885.4 403.3 516.3 1,719.6 14,312.5 730.6 1,999.1 246.0 1,171.2 399.9 4,546.8 3,185.3 689.7 8,421.8 1.5 41.1 5,949.8 (108.4) 5,884.0 6.7 5,890.7 14,312.5 See Notes to Consolidated Financial Statements. 48 Starbucks Corporation 2017 Form 10-K CONSOLIDATED ST TT AA STARBUCKS CORPORA TION AA ATT TEMENTS OF F CASH FLOWS AA (in millions) Fiscal Year Ended OPERATING ACTIVITIES: Net earnings including noncontrolling interests Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization Deferred income taxes, net Income earned from equity method investees Distributions received from equity method investees Gain resulting from acquisition/sale of equity in joint ventures and certain retail operations Loss on extinguishment of debt Stock-based compensation Excess tax benefit on share-based awards Goodwill Impairments Other Cash provided by changes in operating assets and liabilities: Accounts receivable Inventories Accounts payable Stored value card liability Other operating assets and liabilities Net cash provided by operating activities INVESTING ACTIVITIES: Purchases of investments Sales of investments Maturities and calls of investments Acquisitions, net of cash acquired Additions to property, plant and equipment Net proceeds from sale of equity in joint ventures and certain retail operations Other Net cash used by investing activities FINANCING ACTIVITIES: Proceeds from issuance of long-term debt Repayments of long-term debt Cash used for purchase of non-controlling interest Proceeds from issuance of common stock Excess tax benefit on share-based awards Cash dividends paid Repurchase of common stock Minimum tax withholdings on share-based awards Other Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS: Beginning of period End of period SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of capitalized interest Income taxes, net of refunds Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ 2,884.9 $ 2,818.9 $ 2,759.3 1,067.1 95.1 (310.2) 186.6 (93.5) — 176.0 (77.5) 87.2 68.9 (96.8) 14.0 46.4 130.8 (4.7( 4,174.3 )) (674.4) 1,054.5 149.6 — (1,519.4) 85.4 54.3 (850.0) 750.2 (400.0) — 150.8 77.5 (1,450.4) (2,042.5) (82.8) )) (4.4( (3,001.6) 10.8 333.5 2,128.8 , 2,462.3 96.6 1,389.1 $ $ $ 1,030.1 265.7 (250.2) 223.3 (6.1) — 218.1 (122.8) — 45.1 (55.6) (67.5) 46.9 180.4 248.8 4,575.1 (1,585.7) 680.7 27.9 — (1,440.3) 69.6 24.9 (2,222.9) 1,254.5 — — 160.7 122.8 (1,178.0) (1,995.6) (106.0) (8.4( )) (1,750.0) (3.5( )) 598.7 1,530.1 , 2,128.8 74.7 878.7 $ $ $ 933.8 21.2 (190.2) 148.2 (394.3) 61.1 209.8 (132.4) — 53.8 (82.8) (207.9) 137.7 170.3 261.5 3,749.1 (567.4) 600.6 18.8 (284.3) (1,303.7) 8.9 6.8 (1,520.3) 848.5 (610.1) (360.8) 191.8 132.4 (928.6) (1,436.1) (75.5) (18.1 )) ( (2,256.5) (150.6 )) ( (178.3) 1,708.4 , 1,530.1 69.5 1,072.2 $ $ $ See Notes to Consolidated Financial Statements. Starbucks Corporation 2017 Form 10-K 49 l a t o T s t s e r e t n I y t i u q E g n i l l o r t n o c n o N ’ s r e d l o h e r a h S d e t a l u m u c c A r e h t O e v i s n e h e r p m o C ) s s o L ( / e m o c n I d e n i a t e R s g n i n r a E - d i a P l a n o i t i d d A l a t i p a C n i t n u o m A s e r a h S k c o t S n o m m o C N O I T AA A R O P R O C S K C U B R A TT T S Y T I U Q E F F O S T N E M E T AA A TT T S D E T AA A D I L O S N O C ) a t a d e rr r a h s r e p t p e c x e , s n o i l l i m n i ( 7 . 3 7 2 , 5 $ ) 7 . 4 2 2 ( 7 . 1 1 2 3 . 9 5 7 , 2 4 . 4 2 2 5 . 3 2 ) 8 . 1 3 4 , 1 ( ) 2 . 6 1 0 , 1 ( — 1 . 1 1 4 ) 1 . 1 1 4 ( 0 . 1 9 6 . 9 1 2 0 . 3 5 1 5 . 6 2 9 . 8 1 8 , 2 8 . 9 1 8 , 5 $ 7 . 3 ) 6 . 5 9 9 , 1 ( ) 2 . 6 4 2 , 1 ( 7 . 0 9 8 , 5 $ ) 2 . 7 4 ( 9 . 7 7 1 9 . 4 8 8 , 2 0 . 7 1 1 7 . 8 2 ) 1 . 9 7 0 , 2 ( ) 9 . 5 1 5 , 1 ( 7 . 1 9 . 1 ) 1 . 1 3 ( — — — — — — 1 . 1 1 4 ) 7 . 1 8 3 ( 8 . 1 2 . 1 — — — — — — 7 . 3 7 . 6 2 . 0 — — — — — — $ 0 . 2 7 2 , 5 $ 3 . 5 2 $ 6 . 6 0 2 , 5 $ 4 . 9 3 $ 7 . 0 $ 5 . 9 4 7 ) 6 . 3 9 1 ( 7 . 1 1 2 4 . 7 5 7 , 2 4 . 4 2 2 5 . 3 2 ) 8 . 1 3 4 , 1 ( ) 2 . 6 1 0 , 1 ( — — ) 4 . 9 2 ( — ) 6 . 3 9 1 ( — — — — — — — ) 1 . 1 3 ( — — — — 4 . 7 5 7 , 2 ) 8 . 0 ( — — ) 2 . 2 7 9 ( ) 2 . 6 1 0 , 1 ( — — 7 . 1 1 2 4 . 4 2 2 5 . 3 2 ) 6 . 9 5 4 ( — — — 7 . 1 — — — — — — — 8 . 0 — — — — — 6 . 4 1 6 . 0 ) 0 . 9 2 ( — 4 . 9 4 7 — — $ 0 . 8 1 8 , 5 $ ) 4 . 9 9 1 ( $ 8 . 4 7 9 , 5 $ 1 . 1 4 $ 5 . 1 $ 1 . 5 8 4 , 1 0 . 1 9 6 . 9 1 2 0 . 3 5 1 5 . 6 2 7 . 7 1 8 , 2 — ) 6 . 5 9 9 , 1 ( ) 2 . 6 4 2 , 1 ( — 0 . 1 9 — — — — — — — — — — 7 . 7 1 8 , 2 — ) 5 . 6 9 5 , 1 ( ) 2 . 6 4 2 , 1 ( — — 6 . 9 1 2 0 . 3 5 1 5 . 6 2 — — ) 1 . 9 9 3 ( — — — — — — — — — — — 8 . 9 5 . 0 — — ) 9 . 4 3 ( $ 0 . 4 8 8 , 5 $ ) 4 . 8 0 1 ( $ 8 . 9 4 9 , 5 $ 1 . 1 4 $ 5 . 1 $ 5 . 0 6 4 , 1 ) 2 . 7 4 ( 9 . 7 7 1 7 . 4 8 8 , 2 0 . 7 1 1 7 . 8 2 ) 1 . 9 7 0 , 2 ( ) 9 . 5 1 5 , 1 ( — ) 2 . 7 4 ( — — — — — — — — — 7 . 4 8 8 , 2 ) 4 . 5 5 7 , 1 ( ) 9 . 5 1 5 , 1 ( — — 9 . 7 7 1 0 . 7 1 1 — 7 . 8 2 ) 6 . 3 2 3 ( — — — — — ) 1 . 0 ( — 4 . 1 — — — 1 . 8 5 . 0 — ) 5 . 7 3 ( $ 6 . 1 3 4 , 1 0 . 7 5 4 , 5 $ 9 . 6 $ 1 . 0 5 4 , 5 $ ) 6 . 5 5 1 ( $ 2 . 3 6 5 , 5 $ 1 . 1 4 $ . s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C o t s e t o N e e S 2 . 0 $ f o t i f e n e b x a t g n i d u l c n i , k c o t s n o m m o c f o e l a S n o i t i s i u q c a m o r f g n i t l u s e r t s e r e t n i g n i l l o r t n o c n o N e r a h s r e p 0 8 6 . 0 $ , d e r a l c e d s d n e d i v i d h s a C k c o t s n o m m o c f o e s a h c r u p e R t i l p s k c o t s e n o - r o f - o w T 2 . 0 $ f o t i f e n e b x a t g n i d u l c n i , k c o t s n o m m o c f o e l a S , s U S R f o g n i t s e v / s n o i t p o k c o t s f o e s i c r e x E 3 . 4 2 1 $ f o t i f e n e b x a t g n i d u l c n i n o i t i s i u q c a m o r f g n i t l u s e r t s e r e t n i g n i l l o r t n o c n o N e r a h s r e p 0 5 8 . 0 $ , d e r a l c e d s d n e d i v i d h s a C k c o t s n o m m o c f o e s a h c r u p e R , s U S R f o g n i t s e v / s n o i t p o k c o t s f o e s i c r e x E 4 . 7 7 $ f o t i f e n e b x a t g n i d u l c n i ) s s o l ( / e m o c n i e v i s n e h e r p m o c r e h t O e s n e p x e n o i t a s n e p m o c d e s a b - k c o t S 6 1 0 2 , 2 r e b o t c O , e c n a l a B ) s s o l ( / s g n i n r a e t e N 2 . 0 $ f o t i f e n e b x a t g n i d u l c n i , k c o t s n o m m o c f o e l a S e r a h s r e p 5 0 . 1 $ , d e r a l c e d s d n e d i v i d h s a C k c o t s n o m m o c f o e s a h c r u p e R 7 1 0 2 , 1 r e b o t c O , e c n a l a B t s e r e t n i g n i l l o r t n o c n o n f o e s a h c r u P 5 1 0 2 , 7 2 r e b m e t p e S , e c n a l a B ) s s o l ( / s g n i n r a e t e N ) s s o l ( / e m o c n i e v i s n e h e r p m o c r e h t O e s n e p x e n o i t a s n e p m o c d e s a b - k c o t S , s U S R f o g n i t s e v / s n o i t p o k c o t s f o e s i c r e x E 3 . 1 3 1 $ f o t i f e n e b x a t g n i d u l c n i ) s s o l ( / e m o c n i e v i s n e h e r p m o c r e h t O e s n e p x e n o i t a s n e p m o c d e s a b - k c o t S ) s s o l ( / s g n i n r a e t e N 50 Starbucks Corporation 2017 Form 10-K AA STARBUCKS CORPORA TT TION INDEX FOR NOTES TO CONSOLIDATED FINANCIAL AA STL ATT TEMENTS AA Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 Note 8 Note 9 Note 10 Note 11 Note 12 Note 13 Note 14 Note 15 Note 16 Note 17 Note 18 Summary of Significant Accounting Policies Acquisitions and Divestitures Derivative Financial Instruments Fair Value Measurements Inventories Equity and Cost Investments Supplemental Balance Sheet Information Other Intangible Assets and Goodwill Debt Leases Equity Employee Stock and Benefit Plans Income Taxes Earnings per Share Commitments and Contingencies Segment Reporting Selected Quarterly Financial Information (unaudited) Subsequent Events 52 62 64 67 69 70 70 71 72 74 75 77 79 81 81 82 84 84 Starbucks Corporation 2017 Form 10-K 51 AA STARBUCKS CORPORA TT TION NOTES TO CONSOLIDATED FINANCIAL r , October 2, 2016 AA r October 1, 2017 STL ATT TEMENTS and September 27, 2015 Fiscal Years ended AA YY r Note 1: Summary of Significant Accounting Policies Description of Business fee and tea beverages and a variety of fresh We purchase and roast high-quality cof ff fees that we sell, along with handcrafted cof ff WW and prepared food items, through our company-operated stores. We also sell a variety of cof ff fee and tea products and license our trademarks through other channels such as licensed stores, grocery and national foodservice accounts. WW In this 10-K, Starbucks Corporation (together with its subsidiaries) is referred to as “Starbucks,” the “Company,” “we,” “us” or “our.” yy r four reportable operating segments: 1) We have Americas, which is inclusive of the U.S., Canada, and Latin America; 2) China/ WW Asia Pacific (“CAP”); 3) Europe, Middle East, and Africa (“EMEA”) and 4) Channel Development. We also have several non- ff reportable operating segments, including Teavana, Seattle's Best Cof fee and Evolution Fresh, as well as certain developing businesses such as Siren Retail, which includes the Starbucks ReserveTM Roastery & Tasting Rooms, Starbucks Reserve brand and products and Princi operations, which are combined and referred to as All Other Segments. Unallocated corporate operating expenses, which pertain primarily to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment, are presented as a reconciling item between total segment operating results and consolidated financial results. WW TT TT Additional details on the nature of our business and our reportable operating segments are included in Note 16, Segment Reporting. Principles of Consolidation Our consolidated financial statements reflect the financial position and operating results of Starbucks, including wholly-owned subsidiaries and investees that we control. Investments in entities that we do not control, but have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method. Investments in entities in which we do not have the ability to exercise significant influence are accounted for under the cost method. Intercompany transactions and balances have been eliminated. YY Fiscal Year End Our fiscal year ends on the Sunday closest to September 30. Fiscal year 2017 and 2015 included 52 weeks. Fiscal year 2016 included 53 weeks, with the 53rd week falling in the fourth fiscal quarter . d Estimates and Assumptions Preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Examples include, but are not limited to, estimates for inventory reserves, asset and goodwill impairments, assumptions underlying self-insurance reserves, income from unredeemed stored value cards, stock-based compensation forfeiture rates, future asset retirement obligations and the potential outcome of future tax consequences of events that have been recognized in the financial statements. Actual results and outcomes may differ from these estimates and assumptions. ff ff Cash and Cash Equivalents WW We consider all highly liquid instruments with maturities of three months or less at the time of purchase, as well as credit card receivables for sales to customers in our company-operated stores that generally settle within two to five business days, to be cash equivalents. We maintain cash and cash equivalent balances with financial institutions that exceed federally-insured limits. WW We have not experienced any losses related to these balances, and we believe credit risk to be minimal. WW Our cash management system provides for the funding of all major bank disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks are in excess of the cash balances at certain banks, which creates book overdrafts. Book overdrafts are presented as a current liability in accrued liabilities on our consolidated balance sheets. 52 Starbucks Corporation 2017 Form 10-K Investments Available-for-sale Securities rr AA Our short-term and long-term investments consist primarily of investment-grade debt securities, all of which are classified as -sale securities are recorded at fair value, and unrealized holding gains and losses are recorded, available-for-sale. Available-for net of tax, as a component of accumulated other comprehensive income. Available-for -sale securities with remaining maturities of less than one year and those identified by management at the time of purchase to be used to fund operations within one year -sale are classified as short-term. All other available-for-sale securities are classified as long-term. We evaluate our available-for securities for other than temporary impairment on a quarterly basis. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary. We review several factors to determine whether a loss is other WW than temporary, such as the length and extent of the fair value decline, the financial condition and near -term prospects of the issuer and whether we have the intent to sell or will more likely than not be required to sell before the securities' anticipated recovery, which may be at maturity Purchases and sales are recorded on a trade date basis. . Realized gains and losses are accounted for using the specific identification method. WW AA yy yy TT Trading Securities TT We also have a trading securities portfolio, which is comprised of marketable equity mutual funds and equity exchange-traded WW funds. Trading securities are recorded at fair value and approximates a portion of our liability under our Management Deferred Compensation Plan (“MDCP”). Gains or losses from the portfolio and the change in our MDCP liability are recorded in our consolidated statements of earnings. P Equity and Cost Method Investments Equity investments are accounted for using the equity method of accounting if the investment gives us the ability to exercise significant influence, but not control, over an investee. Equity method investments are included within long-term investments on our consolidated balance sheets. Our share of the earnings or losses as reported by equity method investees are classified as income from equity investees on our consolidated statements of earnings. Equity investments for which we do not have the ability to exercise significant influence are accounted for using the cost method of accounting and are recorded in long-term investments on our consolidated balance sheets. Under the cost method, investments are carried at cost and are adjusted only for other-than-temporary declines in fair value, certain distributions and additional investments. We evaluate our equity and cost method investments for impairment annually and when facts and circumstances indicate that WW WW the carrying value of such investments may not be recoverable. We review several factors to determine whether the loss is other than temporary, such as the length and extent of the fair value decline, the financial condition and near investee, and whether we have the intent to sell or will more likely than not be required to sell before the investment’s anticipated recovery. If a decline in fair value is determined to be other than temporary, an impairment char earnings. -term prospects of the ge is recorded in net yy yy Fair ValueVV Fair value is the price we would receive to sell an asset or pay to transfer a liability (exit price) in an orderly transaction between market participants. For assets and liabilities recorded or disclosed at fair value on a recurring basis, we determine fair value based on the following: Level 1: The carrying value of cash and cash equivalents approximates fair value because of the short-term nature of these instruments. For trading and U.S. government treasury securities and commodity futures contracts, we use quoted prices in active markets for identical assets to determine fair value. Level 2: When quoted prices in active markets for identical assets are not available, we determine the fair value of our available-for-sale securities and our over-the-counter forward contracts, collars and swaps based upon factors such as the quoted market price of similar assets or a discounted cash flow model using readily observable market data, which may include interest rate curves and forward and spot prices for currencies and commodities, depending on the nature of the investment. The fair value of our long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. ff WW Level 3: We determine the fair value of our auction rate securities using an internally-developed valuation model, using inputs . that include interest rate curves, credit and liquidity spreads and effective maturity ff Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property, plant and equipment, goodwill and other intangible assets, equity and cost method investments and other assets. We determine the fair value of these items using Level 3 inputs, as described in the related sections below. WW yy Starbucks Corporation 2017 Form 10-K 53 Derivative Instruments yy We manage our exposure to various risks within our consolidated financial statements according to a market price risk WW management policy. Under this policy, we may engage in transactions involving various derivative instruments to hedge interest rates, commodity prices and foreign currency denominated revenue streams, inventory purchases, assets and liabilities and investments in certain foreign operations. In order to manage our exposure to these risks, we use various types of derivative instruments including forward contracts, commodity futures contracts, collars and swaps. Forward contracts and commodity futures contracts are agreements to buy or sell a quantity of a currency or commodity at a predetermined future date and at a predetermined rate or price. A collar is a strategy that uses a combination of a purchased call option and a sold put option with equal premiums to hedge a portion of anticipated cash flows, or to limit the range of possible gains or losses on an underlying asset or liability to a specific range. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. We do not enter into derivative instruments for speculative purposes. WW A A We record all derivatives on our consolidated balance sheets at fair value. Excluding interest rate swaps and foreign currency WW debt, we generally do not enter into derivative instruments with maturities longer than three years or offset derivative assets and liabilities in our consolidated balance sheets. However, we are allowed to net settle transactions with respective counterparties for certain derivative contracts, inclusive of interest rate swaps and foreign currency forwards, with a single, net amount payable by one party to the other. We also enter into collateral security arrangements that provide for collateral to be received when the net fair value of certain financial instruments fluctuates from contractually established thresholds. As of fl or posted h yy l , of cash collateral l October 1, 2017 d and October 2, 2016 h, the related to the derivative instruments under collateral security arrangements. As of October 1, 2017 h d i d i potential ef fff f fects of collateral, would be a reduction ld b ll f fff fects of netting arrangements with our derivative contracts, excluding the ef potential eff to both derivative assets and liabilities of $7.4 million and $9.4 million, $30.4 b h d i million and net derivative liabilities of derivative liabilities of $ d i f $ h d respectively, resulting in net derivative assets of , resulting in net derivative assets of yy l , and net derivative assets of $24.7 million f d i h d and October 2, 2016, we received and posted d nd net derivative liabilities of $f 31.1 million as of October 1, 2017 80.2 million as of October 2, 2016. , we received and posted $5.8 million and $ i bli h d h , respectively f i ll $19.5 million h ld h d li bili i l d i ll i h dand net li bili i WW f l di i l i i d illi illi f i fi ll f f f f ff i i l i l i i i i l i By using these derivative instruments, we expose ourselves to potential credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. We minimize this credit risk by entering into transactions with carefully selected, credit-worthy counterparties and distribute contracts among several financial institutions to reduce the concentration of credit risk. WW Cash Flow Hedges For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the derivative's gain or loss is reported as a component of other comprehensive income (“OCI”) and recorded in accumulated other comprehensive income (“AOCI”) on our consolidated balance sheets. The gain or loss is subsequently reclassified into net earnings when the ff hedged exposure affects net earnings. ff TT To the extent that the change in the fair value of the contract corresponds to the change in the value of the anticipated transaction using forward rates on a monthly basis, the hedge is considered effective and is recognized as described above. remaining change in fair value of the contract represents the ineffective portion, which is immediately recorded in interest ff income and other, net on our consolidated statements of earnings. ff The Cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge by matching the terms of the contract to the underlying transaction. Cash flows from hedging transactions are classified in the same categories as the cash flows from the respective hedged items. Once established, cash flow hedges generally remain designated as such until the hedged item impacts net earnings, or the anticipated transaction is no longer likely to occur. For de-designated cash flow hedges or for transactions that are no longer likely to occur, the related accumulated derivative gains or losses are recognized in interest income and other, net or interest expense on our consolidated statements of earnings based on the nature of the underlying transaction. Net Investment Hedges For derivative instruments that are designated and qualify as a net investment hedge, the effective portion of the derivative's gain or loss is reported as a component of OCI and recorded in AOCI. The gain or loss will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated. ff TT To the extent that the change in the fair value of the forward contract corresponds to the change in value of the anticipated transactions using spot rates on a monthly basis, the hedge is considered effective and is recognized as described above. The remaining change in fair value of the forward contract represents the ineffective portion, which is immediately recognized in ff interest income and other, net on our consolidated statements of earnings. ff 54 Starbucks Corporation 2017 Form 10-K Fair Value Hedges VV For derivative instruments that are designated and qualify as a fair value hedge, the changes in fair value of the derivative , instruments and the offsetting changes in fair values of the underlying hedged item are recorded in interest income and other net or interest expense on our consolidated statements of earnings. ff Derivatives Not Designated As Hedging Instruments WW We also enter into certain foreign currency forward contracts, commodity futures contracts, collars and swaps that are not designated as hedging instruments for accounting purposes. The change in the fair value of these contracts is immediately recognized in interest income and other, net on our consolidated statements of earnings. Normal Purchase Normal Sale rr We enter into fixed-price and price-to-be-fixed green cof ff fee purchase commitments, which are described further at Note 5, WW Inventories. For both fixed-price and price-to-be-fixed purchase commitments, we expect to take delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on our balance sheets. yy ff Refer to Note 3, Derivative Financial Instruments, and Note 5, Inventories, for further discussion of our derivative instruments and green coffee purchase commitments. ff Receivables, net of Allowance for Doubtful ff Accounts Our receivables are mainly comprised of receivables for product and equipment sales to and royalties from our licensees, as well as receivables from our consumer packaged goods (“CPG”) and foodservice business customers. Our allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method. As of October 1, 2017 and October 2, 2016, our allowance for doubtful accounts was $9.8 million and $9.4 million, respectively. Inventories Inventories are stated at the lower of cost (primarily moving average cost) or market. We record inventory reserves for obsolete and slow-moving inventory and for estimated shrinkage between physical inventory counts. Inventory reserves are based on inventory obsolescence trends, historical experience and application of the specific identification method. As of October 1, 2017 and October 2, 2016, inventory reserves were $38.4 million and $39.6 million, respectively. WW Property, Plant and Equipment yy yy Property, plant and equipment, which includes assets under capital leases, are carried at cost less accumulated depreciation. Cost includes all direct costs necessary to acquire and prepare assets for use, including internal labor and overhead in some cases. Depreciation is computed using the straight-line method over estimated useful lives of the assets, generally ranging from 2 to 15 years for equipment and 30 to 40 years for buildings. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life, generally 10 years. For leases with renewal periods at our option, we generally use the original lease term, excluding renewal option periods, to determine estimated useful lives. If failure to exercise a renewal option imposes an economic penalty to us, we may determine at the inception of the lease that renewal is reasonably assured and include the renewal option period in the determination of the appropriate estimated useful lives. The portion of depreciation expense related to production and distribution facilities is included in cost of sales including occupancy costs on our consolidated statements of earnings. The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. When assets are disposed of, whether through retirement or sale, the net gain or loss is recognized in net earnings. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value less estimated costs to sell. We evaluate property yy , plant and equipment for impairment when facts and circumstances indicate that the carrying values of WW 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 fair value of the asset is estimated using a discounted cash flow model based on forecasted future revenues and operating costs, using internal projections. Property, plant and equipment assets are grouped 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. yy Starbucks Corporation 2017 Form 10-K 55 yy ges of $46.9 million, $25.1 million, and $12.5 million in fiscal 2017, 2016, and 2015, We recognized net disposition char WW respectively. Additionally, we recognized net impairment char 2017, 2016, and 2015, respectively, of which restructuring and impairment expenses. Unless it is restructuring related, the nature of the underlying asset that is impaired or disposed of will determine the operating expense line on which the related impact is recorded on our consolidated statements of earnings. For assets within our retail operations, net impairment and disposition charges are recorded in store operating expenses. For all other assets, these charges are recorded in cost of sales including occupancy costs, other operating expenses or general and administrative expenses. $39.9 million in fiscal 2017 were restructuring related and recorded in ges of $56.1 million, $24.1 million, and $25.8 million in fiscal yy Goodwill WW We evaluate goodwill for impairment annually during our third fiscal quarter circumstances change, such as material deterioration in performance or a significant number of store closures, that would indicate that impairment may exist. When evaluating goodwill 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. Fair value is the price a willing buyer would pay for the reporting unit and is typically calculated using a discounted cash flow model. For certain reporting units, where deemed appropriate, we may also utilize a market approach for estimating fair value. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. , or more frequently if an event occurs or As part of our ongoing operations, we may close certain stores within a reporting unit containing goodwill due to underperformance of the store or inability to renew our lease, among other reasons. We may abandon certain assets associated with a closed store, including leasehold improvements and other non-transferable assets. When a portion of a reporting unit that constitutes a business is to be disposed of, goodwill associated with the business is included in the carrying amount of the business in determining any loss on disposal. Our evaluation of whether the portion of a reporting unit being disposed of constitutes a business occurs on the date of abandonment. Although an operating store meets the accounting definition of a business prior to abandonment, it does not constitute a business on the closure date because the remaining assets on that date do not constitute an integrated set of assets that are capable of being managed for the purpose of providing a return to investors. As a result, when closing individual stores, we do not include goodwill in the calculation of any loss on disposal of the related assets. WW As noted above, if store closures are indicative of potential impairment of goodwill at the reporting unit level, we perform an evaluation of our reporting unit goodwill when such closures occur. Due to the strategic decision to close Teavana branded retail stores and our subsequent review of this reporting unit's fair value, we recorded goodwill impairment charges of $69.3 million during the third quarter of fiscal 2017. TT yy Additionally, we recorded a partial goodwill impairment of $17.9 million related to our Switzerland retail reporting unit during the third quarter of fiscal 2017, primarily due to ongoing macro economic factors. There were no material goodwill impairment charges recorded during fiscal 2016 and 2015. Refer to Note 8, Other Intangible Assets and Goodwill, for further discussions. Other Intangible Assets Other intangible assets include finite-lived intangible assets, which mainly consist of acquired and reacquired rights, trade secrets, licensing agreements, contract-based patents and copyrights. These assets are amortized over their estimated useful lives and are tested for impairment using a similar methodology to our property, plant and equipment, as described above. yy Indefinite-lived intangibles, which consist primarily of trade names and trademarks, are tested for impairment annually during the third fiscal quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. When evaluating other intangible assets for impairment, we may first perform a qualitative assessment to determine whether it is more likely than not that an intangible asset group is impaired. If we do not perform the qualitative assessment, or if we determine that it is not more likely than not that the fair value of the intangible asset group exceeds its carrying amount, we calculate the estimated fair value of the intangible asset group. Fair value is the price a willing buyer would pay for the intangible asset group and is typically calculated using an income approach, such as a relief-from-royalty model. If the carrying amount of the intangible asset group exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. In addition, we continuously monitor and may revise our intangible asset useful lives if and when facts and circumstances change. There were no significant other intangible asset impairment charges recorded during fiscal 2017, 2016, and 2015. 56 Starbucks Corporation 2017 Form 10-K Insurance Reserves We use a combination of insurance and self-insurance mechanisms, including a wholly-owned captive insurance entity and WW compensation, participation in a reinsurance treaty, to provide for the potential liabilities for certain risks, including workers’ healthcare benefits, general liability, property insurance and director and of ff ficers’ the risks that are retained by us are not discounted and are estimated, in part, by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions. liability insurance. Liabilities associated with yy yy Revenue Recognition Consolidated revenues are presented net of intercompany eliminations for wholly-owned subsidiaries and investees controlled by us and for product sales to and royalty and other fees from licensees accounted for under the equity method. Additionally, yy consolidated revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates. Company-operated Store Revenues rr Company-operated store revenues are recognized when payment is tendered at the point of sale. Company-operated store revenues are reported net of sales, use or other transaction taxes that are collected from customers and remitted to taxing authorities. rr Licensed Store Revenues Licensed store revenues consist of product and equipment sales to licensees, as well as royalties and other fees paid by licensees. Sales of coffee, tea, food and related products are generally recognized upon shipment to licensees, depending on contract terms. Shipping charges billed to licensees are also recognized as revenue, and the related shipping costs are included in cost of sales including occupancy costs on our consolidated statements of earnings. ff Initial nonrefundable development fees for licensed stores are recognized upon substantial performance of services for new market business development activities, such as initial business, real estate and store development planning, as well as providing operational materials and functional training courses for opening new licensed retail markets. Additional store licensing fees are recognized when new licensed stores are opened. Royalty revenues based upon a percentage of reported sales, and other continuing fees, such as marketing and service fees, are recognized on a monthly basis when earned. CPG, Foodservice and Other Revenues CPG, foodservice and other revenues primarily include sales of packaged coffee and tea as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery yy , warehouse clubs and specialty retail stores, sales to our national ff foodservice accounts, and revenues from sales of products to and license fee revenues from manufacturers that produce and market Starbucks-, Seattle’s Best Coffee- and to-drink beverages and related products to grocery and warehouse club stores are generally recognized when received by the customer or distributor, depending on contract terms. Revenues are recorded net of sales discounts given to customers for trade promotions and other incentives and for sales return allowances, which are determined based on historical patterns. ff Tazo-branded products through licensing agreements. Sales of cof fee, tea, ready- TT ff ff Revenues from sales of products to manufacturers that produce and market Starbucks-, Seattle’s Best Coffee- and products through licensing agreements are generally recognized when the product is received by the manufacturer or distributor. License fee revenues from manufacturers are based on a percentage of sales and are recognized on a monthly basis when earned. National foodservice account revenues are recognized when the product is received by the customer or distributor. TT Tazo-branded ff Sales to customers through CPG channels and national foodservice accounts, including sales to national distributors, are recognized net of certain fees paid to the customer. We characterize these fees as a reduction of revenue unless we are able to identify a sufficiently separable benefit from the customer's purchase of our products such that we could have entered into an exchange transaction with a party other than the customer in order to receive such benefit, and we can reasonably estimate the fair value of such benefit. WW ff VV Stored Vrr alue Car dsrr Stored value cards, primarily Starbucks Cards, can be activated at our company-operated and most licensed store locations, online at StarbucksStore.com or via mobile devices held by our customers, and at certain other third party locations, such as grocery stores, although they cannot be reloaded at these third party locations. When an amount is loaded onto a stored value card at any of these locations, we recognize a corresponding liability for the full amount loaded onto the card, which is recorded within stored value card liability on our consolidated balance sheets. Stored value cards can be redeemed at company-operated and most licensed stores, as well as online. When a stored value card is redeemed at a company-operated store or online, we recognize revenue by reducing the stored value card liability. When a Starbucks Corporation 2017 Form 10-K 57 stored value card is redeemed at a licensed store location, we reduce the corresponding stored value card liability and cash, which is reimbursed to the licensee. There are no expiration dates on our stored value cards, and in most markets, we do not charge service fees that cause a decrement to customer balances. While we will continue to honor all stored value cards presented for payment, management may determine the likelihood of redemption, based on historical experience, is deemed to be remote for certain cards due to long periods of inactivity. In these circumstances, if management also determines there is no requirement for remitting balances to government agencies under unclaimed property laws, unredeemed card balances may then be recognized as breakage income, which is included in interest income and other, net on our consolidated statements of earnings. In fiscal 2017, 2016, and 2015, we recognized breakage income of $104.6 million, $60.5 million, and $39.3 million, respectively. Loyalty Program rr ff April 2016, we modified our transaction-based loyalty program, My Starbucks Rewards® to a In the U.S. and Canada, effective spend-based program, Starbucks RewardsTM. For fiscal 2016, the existing transaction-based programs remain unchanged for other markets. During fiscal 2017, we launched Starbucks RewardsTM in Japan. Customers in the U.S., Canada, and certain other countries who register their Starbucks Card are automatically enrolled in the program. They earn loyalty points (“Stars”) TM stores, as well as on certain packaged coffee products purchased with each purchase at participating Starbucks® and Teavana in select Starbucks® stores, online, and through CPG channels. After accumulating a certain number of Stars, the customer earns a reward that can be redeemed for free product that, regardless of where the related Stars were earned within that country, yy will be honored at company-operated stores and certain participating licensed store locations in that same country. TT ff Regardless of whether it is a spend or transaction-based program, we defer revenue associated with the estimated selling price of Stars earned by our program members towards free product as each Star is earned, and a corresponding liability is established within stored value card liability on our consolidated balance sheets. The estimated selling price of each Star earned is based on the estimated value of the product for which the reward is expected to be redeemed, net of Stars we do not expect to be redeemed, based on historical redemption patterns. Stars generally expire if inactive for a period of six months. When a customer redeems an earned reward, we recognize revenue for the redeemed product and reduce the related loyalty program liability. Advertising We expense most advertising costs as they are incurred, except for certain production costs that are expensed the first time the WW advertising takes place. Advertising expenses totaled $282.6 million, $248.6 million and $227.9 million in fiscal 2017, 2016, and 2015, respectively. Store Preopening Expenses Costs incurred in connection with the start-up and promotion of new store openings are expensed as incurred. Leases Operating Leases ff We lease retail stores, roasting, distribution and warehouse facilities and of fice space for corporate administrative purposes WW under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, lease premiums, rent escalation clauses and/or contingent rent provisions. We recognize amortization of lease incentives, premiums and minimum rent expenses on a straight-line basis beginning on the date of initial possession, which is generally when we enter the space and begin to make improvements in preparation for intended use. WW For tenant improvement allowances and rent holidays, we record a deferred rent liability within accrued liabilities, or other long-term liabilities, on our consolidated balance sheets and amortize the deferred rent over the terms of the leases as reductions to rent expense in cost of sales including occupancy costs on our consolidated statements of earnings. For premiums paid upfront to enter a lease agreement, we record a prepaid rent asset in prepaid expenses and other non-current assets on our consolidated balance sheets and amortize the premium over the terms of the leases as additional rent expense in cost of sales including occupancy costs on our consolidated statements of earnings. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial possession, we record minimum rent expense on a straight-line basis over the terms of the leases in cost of sales including occupancy costs on our consolidated statements of earnings, with the adjustments to cash rent accrued as deferred rent in our consolidated balance sheets. 58 Starbucks Corporation 2017 Form 10-K Certain leases provide for contingent rent, which is determined as a percentage of gross sales in excess of specified levels. We WW record a contingent rent liability in accrued occupancy costs within accrued liabilities on our consolidated balance sheets and the corresponding rent expense when we determine that achieving the specified levels during the fiscal year is probable. When ceasing operations of company-operated stores under operating leases, in cases where the lease contract specifies a termination fee due to the landlord, we record such expense at the time written notice is given to the landlord. In cases where terms, including termination fees, are yet to be negotiated with the landlord, we will record the expense upon signing of an agreement with the landlord. In cases where the landlord does not allow us to prematurely exit the lease, we recognize an expense equal to the present value of the remaining lease payments to the landlord less any projected sublease income at the cease-use date. Lease Financing Arrangements We are sometimes involved in the construction of leased buildings, primarily stores. When we qualify as the deemed owner of WW these buildings due to significant involvement during the construction period under build-to-suit lease accounting requirements and do not qualify for sales recognition under sales-leaseback accounting guidance, we record the cost of the related buildings in property, plant and equipment. The offsetting lease financing obligations are recorded in other long-term liabilities, with the current portion recorded in in accrued occupancy costs within accrued liabilities on our consolidated balance sheets. These assets and obligations are amortized in depreciation and amortization and interest expense, respectively, on our consolidated statements of earnings based on the terms of the related lease agreements. yy yy ff Asset Retirement Obligations We recognize a liability for the fair value of required asset retirement obligations (“ARO”) when such obligations are incurred. WW Our AROs are primarily associated with leasehold improvements, which, at the end of a lease, we are contractually obligated to remove in order to comply with the lease agreement. At the inception of a lease with such conditions, we record an ARO liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. We estimate the liability using a number of assumptions, including store closing costs, cost inflation rates and discount rates, and accrete the liability to its projected future value over time. The capitalized asset is depreciated using the same depreciation convention as leasehold improvement assets. Upon satisfaction of the ARO conditions, any difference between the recorded the actual retirement costs incurred is recognized as a gain or loss in cost of sales including occupancy costs on our consolidated statements of earnings. As of October 1, 2017 and October 2, 2016, our net ARO assets included in property, plant and equipment were $12.4 million and $9.3 million, respectively, and our net yy liabilities were $70.0 million and $67.9 million, respectively. yy ARO liabilities included in other long-term ARO liability and WW ff Stock-based Compensation WW WW We maintain several equity incentive plans under which we may grant non-qualified stock options, incentive stock options, WW restricted stock, restricted stock units (“RSUs”) or stock appreciation rights to employees, non-employee directors and consultants. We also have an employee stock purchase plan (“ESPP”). RSUs issued by us are equivalent to nonvested shares under the applicable accounting guidance. We record stock-based compensation expense based on the fair value of stock awards at the grant date and recognize the expense over the related service period following a graded vesting expense schedule. Expense for performance-based RSUs is recognized when it is probable the performance goal will be achieved. Performance goals are determined by the Board of Directors and may include measures such as earnings per share, operating income and return on invested capital. The fair value of each stock option granted is estimated on the grant date using the Black-Scholes- Merton option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our historical experience. The fair value of RSUs is based on the closing price of Starbucks common stock on the award date, less the present value of expected dividends not received during the vesting period. Compensation expense is recognized over the requisite service period for each separately vesting portion of the award, and only for those awards expected to vest, with forfeitures estimated at the date of grant based on our historical experience and future expectations. yy Foreign Currency Translation TT Our international operations generally use their local currency as their functional currency. Assets and liabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthly exchange rates during the year. Resulting translation adjustments are reported as a component of OCI and recorded in AOCI on our consolidated balance sheets. ff Starbucks Corporation 2017 Form 10-K 59 Income Taxes TT WW We compute income taxes using the asset and liability method, under which deferred income taxes are recognized based on the ff differences between the financial statement carrying amounts and the respective tax basis 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. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. ff ff WW 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. In evaluating our ability to recover our deferred tax assets within the jurisdictions 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 recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. WW 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 from an uncertain tax position 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. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. 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. WW ff r Starbucks recognizes interest and penalties related to income tax matters in income tax expense on our consolidated statements of earnings. Accrued interest and penalties are included within the related tax liability on our consolidated balance sheets. Stock Split ff On April 9, 2015, we effected a two-for-one stock split of our $0.001 par value common stock for shareholders of record as of March 30, 2015. All share and per-share data in our consolidated financial statements and notes has been retroactively adjusted to reflect this stock split. We adjusted shareholders' equity to reflect the stock split by reclassifying an amount equal to the par value of the additional shares arising from the split from retained earnings to common stock during the second quarter of fiscal 2015, resulting in no net impact to shareholders' equity on our consolidated balance sheets. WW Earnings per Share Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock and the effect of dilutive potential common shares outstanding during the period, calculated using the treasury stock method. Dilutive ff potential common shares include outstanding stock options and RSUs. Performance-based RSUs are considered dilutive when the related performance criterion has been met. Common Stock Share Repurchases WW We may repurchase shares of Starbucks common stock under a program authorized by our Board of Directors, including pursuant to a contract, instruction or written plan meeting the requirements of Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934. Under applicable Washington State law ww on the financial statements. Instead, the par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital and from retained earnings, once additional paid-in capital is depleted. , shares repurchased are retired and not displayed separately as treasury stock WW 60 Starbucks Corporation 2017 Form 10-K Recent Accounting Pronouncements In August 2017, the Financial Accounting Standards Board (“FASB”) amended its guidance on the financial reporting of FF hedging relationships. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness, expands permissible cash flow hedges on contractually specified components, and simplifies hedge documentation and effectiveness assessment. ff a modified retrospective approach on existing cash flow and net investment hedges. The presentation and disclosure requirements will be applied prospectively. We are currently evaluating the impact this guidance will have on our consolidated financial statements and the timing of adoption. The guidance will be effective at the beginning of our first quarter of fiscal year 2020 and will require WW ff ff FF In January 2017, the FASB issued guidance that simplifies the measurement of goodwill impairment. Under this new guidance, an impairment charge, if triggered, is calculated as the difference between a reporting unit’ s carrying value and fair value, but it is limited to the carrying value of goodwill. During the second quarter of fiscal 2017, we elected to early-adopt this guidance on a prospective basis. ff FF In October 2016, the FASB issued guidance on the accounting for income tax ef ff fects of intercompany sales or transfers of assets other than inventory. The guidance requires entities to recognize the income tax impact of an intra-entity sale or transfer of an asset other than inventory when the sale or transfer occurs, rather than when the asset has been sold to an outside party. The guidance will require a modified retrospective application with a cumulative catch-up adjustment to opening retained earnings at the beginning of our first quarter of fiscal 2019 but permits adoption in an earlier period. We are currently evaluating the impact this guidance will have on our consolidated financial statements and the timing of adoption. WW FF In June 2016, the FASB issued guidance on the measurement and recognition of credit losses on most financial assets. For trade receivables, loans, and held-to-maturity debt securities, the current probable loss recognition methodology is being replaced by an expected credit loss model. For available-for-sale debt securities, the recognition model on credit losses is generally unchanged, except the losses will be presented as an adjustable allowance. The guidance will be applied retrospectively with The guidance will become effective at the beginning of our first the cumulative effect recognized as of the date of adoption. quarter of fiscal 2021 but can be adopted as early as the beginning of our first quarter of fiscal 2020. We are currently evaluating the impact this guidance will have on our consolidated financial statements and the timing of adoption. WW ff ff yy FF In March 2016, the FASB issued guidance related to stock-based compensation, which changes the accounting and classification of excess tax benefits and minimum tax withholdings on share-based awards. With this adoption, excess tax benefits and tax deficiencies related to stock-based compensation will be prospectively reflected as a reduction of, or increase in, income tax expense in our consolidated statement of earnings instead of additional paid-in capital on our consolidated balance sheet. Additionally, within our consolidated statement of cash flows, this guidance will require excess tax benefits to be yy , in the same manner as other cash flows related to income yy presented as an operating activity, rather than a financing activity taxes. As a result, we expect the adoption will have a significant impact on income tax expense and earnings per share, as reported in our consolidated statement of earnings and consolidated statement of cash flows. We will adopt this guidance in the first quarter of fiscal 2018. If the new guidance had been adopted for fiscal years 2017, 2016 and 2015, approximately $78 million, $125 million and $132 million, respectively, of excess net tax benefits recorded to additional paid-in capital would have been recorded as a reduction to income tax expense. Excess tax benefits or deficiencies are based on our stock price at the time stock options are exercised or when restricted stock units vest, therefore prior year amounts are not indicative of the future impact of this guidance. WW W yy FF In March 2016, the FASB issued guidance for financial liabilities resulting from selling prepaid stored value products that are redeemable at third-party merchants. Under the new guidance, expected breakage amounts associated with these products must be recognized proportionately in earnings as redemption occurs. Our current accounting policy of applying the remote method to all of our stored value cards, including cards redeemable at the third-party licensed locations, will no longer be allowed. We WW will adopt and implement the provisions of this guidance and the new revenue recognition standard issued by the FASB, as discussed below, in the first quarter of fiscal 2019. ww FF yy FF In February 2016, the FASB issued guidance on the recognition and measurement of leases. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. The guidance retains the current accounting for lessors and does not make significant changes to the recognition, measurement, and presentation of expenses and cash flows by a lessee. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance will require modified retrospective application at the beginning of our first quarter of fiscal 2020, with optional practical expedients, but permits adoption in an earlier period. We are currently evaluating the impact this guidance will have on our consolidated financial statements. We expect this adoption will result in a material increase in the assets and liabilities on our consolidated balance sheets but will likely have an insignificant impact on our consolidated statements of earnings. In preparation for adoption of the guidance, we are in the process of implementing controls and key system changes to enable the preparation of financial information. WW WW Starbucks Corporation 2017 Form 10-K 61 FF In April 2015, the FASB issued guidance on the financial statement presentation of debt issuance costs. these costs to be presented in the balance sheet as a reduction of the related debt liability rather than as an asset. We WW retrospectively adopted this guidance in the first quarter of fiscal 2017, which resulted in the reclassification of $17.0 million of debt issuance costs previously presented in prepaid expenses and other current assets and other long-term assets to long-term debt in our consolidated balance sheet as of October 2, 2016. Components of our long-term debt and aggregate debt issuance costs and unamortized premium are disclosed in Note 9, Debt. This guidance requires FF WW In May 2014, the FASB issued guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the overall impact this guidance will have on our consolidated financial statements, as well as the expected method of adoption. Based on our continued assessment, which may identify other accounting impacts, we have determined the adoption will change the timing of recognition and classification of our stored value card breakage income, which is currently recognized using the remote method and recorded in interest income and other, net. The new guidance will require application of the proportional method and classification within total net revenues on our consolidated statements of earnings. Additionally, the new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. We will adopt this guidance in the first quarter of fiscal 2019. WW yy ff Note 2: Acquisitions and Divestitures Fiscal 2017 In the fourth quarter of fiscal 2017, we sold our company-operated retail store assets and operations in Singapore to Maxim's Caterers Limited, converting these operations to a fully licensed market, for a total of $119.9 million. This transaction resulted in a pre-tax gain of $83.9 million, which was included in interest income and other, net on our consolidated statements of earnings. Fiscal 2016 During the third quarter of fiscal 2016, we sold our ownership interest in our Germany retail business to AmRest Holdings SE for a total of $47.3 million. This transaction converted these company-operated stores to a fully licensed market and resulted in , net on our condensed consolidated statements of an insignificant pre-tax gain, which was included in interest income and other earnings. t Fiscal 2015 During the fourth quarter of fiscal 2015, we sold our company-operated retail store assets and operations in Puerto Rico to Baristas Del Caribe, LLC, converting these operations to a fully licensed market, for a total of $8.9 million. This transaction resulted in an insignificant pre-tax gain, which was included in interest income and other earnings. , net on the consolidated statements of t On September 23, 2014, we entered into a tender offer bid agreement with Starbucks Cof ff fee Japan, Ltd. (“Starbucks Japan”), at the time a 39.5% owned equity method investment, and our former joint venture partner, Sazaby League, Ltd. (“Sazaby”), to acquire the remaining 60.5% ownership interest in Starbucks Japan for approximately $876 million, through a two-step tender . Acquiring Starbucks Japan further leverages our existing infrastructure to continue disciplined retail store growth and ff offer expand our presence into other channels in the Japan market, such as CPG, licensing and foodservice. ff 62 Starbucks Corporation 2017 Form 10-K The following table summarizes the final allocation of the total consideration to the fair values of the assets acquired and liabilities assumed as of October 31, 2014, which are reported within our China/Asia Pacific segment (in millions): Consideration: Cash paid for Sazaby's 39.5% equity interest Fair value of our preexisting 39.5% equity interest Total consideration Fair value of assets acquired and liabilities assumed: Cash and cash equivalents Accounts receivable, net Inventories Prepaid expenses and other current assets Property, plant and equipment Other long-term assets Other intangible assets Goodwill Total assets acquired Accounts payable Accrued liabilities Stored value card liability Deferred income taxes Other long-term liabilities Total liabilities assumed Noncontrolling interest Total consideration $ $ $ $ 508.7 577.0 1,085.7 224.4 37.4 26.4 35.7 282.9 141.4 323.0 815.6 1,886.8 (54.5) (115.9) (36.5) (67.3) (115.8) (390.0) (411.1) 1,085.7 Other current and long-term assets acquired primarily include various deposits, specifically lease and key money deposits. Accrued liabilities and other long-term liabilities assumed primarily include financing obligations associated with build-to-suit leases as well as asset retirement obligations. The intangible assets are finite-lived and include reacquired rights, licensing agreements with Starbucks Japan's current licensees and Starbucks Japan's customer loyalty program. The reacquired rights to exclusively operate licensed Starbucks® retail stores in Japan were assigned a fair value of $305.0 million; these rights will be amortized on a straight-line basis through March 2021. Amortization expense for these finite-lived intangible assets for fiscal year 2017 was $48.4 million, and, as of October 1, 2017, accumulated amortization was $139.1 million. Future amortization expense is estimated to be approximately $47.0 million each year for the next three years, $24.0 million in the fourth year and $5 million thereafter. The $815.6 million of goodwill represents the intangible assets that do not qualify for separate recognition and primarily includes the acquired customer base, the acquired workforce including store partners in the region that have strong relationships with these customers, the existing geographic retail and online presence, and the expected geographic presence in new channels. The goodwill was allocated to the China/Asia Pacific segment and is not deductible for income tax purposes. Due to foreign currency translation, the balance of goodwill related to the acquisition decreased $32.2 million to $783.4 million as of October 1, 2017. As a result of this acquisition, we remeasured the carrying value of our preexisting 39.5% equity method investment to fair value, which resulted in a pre-tax gain of $390.6 million that was presented separately as gain resulting from acquisition of joint venture within other income and expenses on the consolidated statements of earnings. We began consolidating Starbucks Japan's results of operations and cash flows into our consolidated financial statements WW beginning after October 31, 2014. For the year ended September 27, 2015, Starbucks Japan's net revenues and net earnings included in our consolidated statement of earnings were $1.1 billion and $108.5 million, respectively. Starbucks Corporation 2017 Form 10-K 63 The following table provides the supplemental pro forma revenue and net earnings of the combined entity had the acquisition date of Starbucks Japan been the first day of our first quarter of fiscal 2014 rather than during our first quarter of fiscal 2015 (in millions): Revenue Net earnings attributable to Starbucks Pro Forma (unaudited) Year Ended Sep 27, 2015 $ 19,254.5 2,380.9 The amounts in the supplemental pro forma earnings for the period presented above fully eliminate intercompany transactions, apply our accounting policies and reflect adjustments for additional occupancy costs, depreciation and amortization that would have been charged assuming the same fair value adjustments to leases, property, plant and equipment and acquired intangibles had been applied on September 30, 2013, including the acquisition-related gain. These pro forma results are unaudited and are not necessarily indicative of results of operations that would have occurred had the acquisition actually occurred in the prior year period or indicative of the results of operations for any future period. yy Note 3: Derivative Financial Instruments Interest Rates We are subject to interest rate volatility with regard to existing and future issuances of debt. From time to time, we enter into WW swap agreements to manage our exposure to interest rate fluctuations. To hedge the variability in cash flows due to changes in benchmark interest rates, we enter into interest rate swap agreements TT related to anticipated debt issuances. These agreements are cash settled at the time of the pricing of the related debt. The effective portion of the derivative's gain or loss is recorded in accumulated other comprehensive income (“AOCI”) and is ff subsequently reclassified to interest expense over the life of the related debt. During fiscal 2016, we entered into forward- starting interest rate swap agreements with an aggregate notional amount of $375 million related to the $500 million and $250 million of 5-year 2.100% Senior Notes (the “2021 notes”) due February 2021 and $500 million of 10-year 2.450% Senior Notes (the “2026 notes”) due June 2026. Refer to Note 9, Debt, for details of the components of our long-term debt. We cash settled these swap agreements at the time of pricing the 2021 and 2026 notes. WW To hedge the exposure to changes in the fair value of our fixed-rate debt, we enter into interest rate swap agreements, which are TT designated as fair value hedges. The changes in fair value of these derivative instruments and the offsetting changes in fair values of the underlying hedged debt are recorded in interest expense and have an insignificant impact on our consolidated statement of earnings. We entered into an interest rate swap agreement during the third quarter of fiscal 2017 related to our 3.850% Senior Notes due in October 2023 (“2023 notes”). Refer to Note 9, Debt, for additional information on our long-term debt. WW ff Foreign Currency To reduce cash flow volatility from foreign currency fluctuations, we enter into forward and swap contracts to hedge portions TT of cash flows of anticipated intercompany royalty payments, inventory purchases and intercompany borrowing and lending activities. The effective portion of the derivative's gain or loss is recorded in ff cost of sales including occupancy costs or interest income and other, net, respectively, when the hedged exposure af fects net earnings. AOCI and is subsequently reclassified to revenue, yy ff To mitigate foreign currency transaction risk of intercompany borrowings, we enter into cross-currency swap contracts, which TT are designated as cash flow hedges. Gains and losses from these swaps offset the changes in value of interest and principal payments as a result of changes in foreign exchange rates. There are no credit-risk-related contingent features associated with these swaps, although we may hold or post collateral depending upon the gain or loss position of the swap agreements. ff We also enter into forward contracts or use foreign currency-denominated debt to hedge the foreign currency exposure of our WW net investment in certain international operations. The effective portion of the derivative's gain or loss is recorded in is subsequently reclassified to net earnings when the hedged net investment is either sold or substantially liquidated. AOCI and ff To mitigate the foreign exchange risk of certain balance sheet items, we enter into foreign currency forward and swap contracts TT that are not designated as hedging instruments. Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency denominated payables and receivables; both are recorded in interest income and other, net. ff 64 Starbucks Corporation 2017 Form 10-K Commodities Depending on market conditions, we may enter into coffee futures contracts and collars to hedge a portion of anticipated cash ff flows under our price-to-be-fixed green coffee contracts, which are described further in Note 5, Inventories. portion of each derivative's gain or loss is recorded in AOCI and is subsequently reclassified to cost of sales including occupancy costs when the hedged exposure affects net earnings. ff The effective ff ff To mitigate the price uncertainty of a portion of our future purchases, primarily of dairy products, diesel fuel and other TT commodities, we enter into swap contracts, futures and collars that are not designated as hedging instruments. Gains and losses from these derivatives are recorded in interest income and other, net and help offset price fluctuations on our beverage, food, packaging and transportation costs, which are included in cost of sales including occupancy costs on our consolidated statements of earnings. ff Gains and losses on derivative contracts designated as hedging instruments included in AOCI and expected to be reclassified into earnings within 12 months, net of tax (in millions): Interest rates Cross-currency swaps Foreign currency - other Coffee Net Investment Hedges: Foreign currency Foreign currency debt Net Gains/(Losses) Included in AOCI Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Net Gains/ (Losses) Expected to be Reclassified from AOCI into Earnings within 12 Months Contract Remaining Maturity (Months) $ 17.6 $ (6.0) (9.1) (6.6) 16.2 (2.2) $ 20.5 (7.7) (0.4) (1.6) $ 30.1 (27.8) 29.0 (5.7) 1.3 — 1.3 — 3.0 — (5.8) (6.6) 0.1 — 0 86 36 4 0 79 Pretax gains and losses on derivative contracts designated as hedging instruments recognized in other comprehensive income (“OCI”) and reclassifications from AOCI to earnings (in millions): Year Ended Gains/(Losses) Recognized in OCI Before Reclassifications Gains/(Losses) Reclassified from AOCI to Earnings Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Interest rates Cross-currency swaps Foreign currency - other Coffee Net Investment Hedges: Foreign currency Foreign currency debt $ — $ (10.3) $ (6.8) $ 4.8 $ 5.0 $ 59.5 1.8 (8.1) 23.6 (3.5) (75.7) (25.4) 1.7 — — 11.4 52.0 (9.0) 4.3 — 57.2 11.4 (2.7) — — (101.1) 19.1 (2.8) — — 3.2 46.2 26.1 (3.5) 7.2 — Starbucks Corporation 2017 Form 10-K 65 Pretax gains and losses on non-designated derivatives and designated fair value hedging instruments recognized in earnings (in millions): Non-Designated Derivatives: Foreign currency - other Dairy Diesel fuel and other commodities Designated Fair Value Hedging Instruments: Interest rate swap Notional amounts of outstanding derivative contracts (in millions): Interest rate swap Cross-currency swaps Foreign currency - other Coffee Dairy Diesel fuel and other commodities Fair value of outstanding derivative contracts (in millions): Gains/(Losses) Recognized in Earnings Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ $ 4.6 — 1.3 (5.7) $ (5.5) (0.2) 27.1 (3.8) (9.0) (5.2) — — $ Oct 1, 2017 Oct 2, 2016 $ 750 514 901 — 14 41 — 660 688 7 76 46 Designated Derivative Instruments: Cross-currency swaps Foreign currency - other Coffee Net investment hedges Interest rate swap Non-designated Derivative Instruments: Foreign currency Dairy Diesel fuel and other commodities Derivative Assets Derivative Liabilities Oct 1, 2017 Oct 2, 2016 Oct 1, 2017 Oct 2, 2016 $ 12.4 $ 7.7 — 0.3 — 15.8 — 1.6 — $ 20.8 9.8 $ 20.8 1.8 — — 6.2 1.5 3.8 — — 3.8 1.4 2.4 0.3 57.0 24.0 — — — 6.5 1.6 0.5 Additional disclosures related to cash flow hedge gains and losses included in AOCI, as well as subsequent reclassifications to earnings, are included in Note 11, Equity. 66 Starbucks Corporation 2017 Form 10-K VV Note 4: Fair Value Measur ements VV Assets and Liabilities Measured at Fair Value on a Recurring Basis (in millions): Assets: Cash and cash equivalents Short-term investments: Available-for-sale securities Agency obligations Commercial paper Corporate debt securities Foreign government obligations U.S. government treasury securities Mortgage and other asset-backed securities Certificates of deposit Total available-for-sale securities Trading securities Total short-term investments Prepaid expenses and other current assets: Derivative assets Long-term investments: Available-for-sale securities Agency obligations Corporate debt securities Auction rate securities Foreign government obligations U.S. government treasury securities State and local government obligations Mortgage and other asset-backed securities Total long-term investments Other long-term assets: Derivative assets Total assets Liabilities: Accrued liabilities: Derivative liabilities Other long-term liabilities: Derivative liabilities Total liabilities Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance at Oct 1, 2017 $ 2,462.3 $ 2,462.3 $ — $ 7.5 2.0 49.4 7.1 81.4 2.0 2.3 151.7 76.9 228.6 13.4 21.8 207.4 5.9 17.1 127.4 7.0 155.7 542.3 — — — — 81.4 — — 81.4 76.9 158.3 0.1 — — — — 127.4 — — 127.4 7.5 2.0 49.4 7.1 — 2.0 2.3 70.3 — 70.3 13.3 21.8 207.4 — 17.1 — 7.0 155.7 409.0 24.4 3,271.0 $ — 2,748.1 $ 24.4 517.0 $ 16.4 $ 2.5 $ 13.9 $ 22.1 38.5 $ — 2.5 $ 22.1 36.0 $ $ $ $ — — — — — — — — — — — — — — 5.9 — — — — 5.9 — 5.9 — — — Starbucks Corporation 2017 Form 10-K 67 Assets: Cash and cash equivalents Short-term investments: Available-for-sale securities Agency obligations Commercial paper Corporate debt securities Foreign government obligations U.S. government treasury securities State and local government obligations Certificates of deposit Total available-for-sale securities Trading securities Total short-term investments Prepaid expenses and other current assets: Derivative assets Long-term investments: Available-for-sale securities Agency obligations Corporate debt securities Auction rate securities Foreign government obligations U.S. government treasury securities State and local government obligations Mortgage and other asset-backed securities Total long-term investments Other long-term assets: Derivative assets Total assets Liabilities: Accrued liabilities: Derivative liabilities Other long-term liabilities: Derivative liabilities Total Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Balance at Oct 2, 2016 $ 2,128.8 $ 2,128.8 $ — $ 1.3 2.6 34.2 5.5 15.8 0.5 5.8 65.7 68.7 134.4 27.7 44.4 459.3 5.7 46.7 358.2 57.5 169.9 1,141.7 — — — — 15.8 — — 15.8 68.7 84.5 3.1 — — — — 358.2 — — 358.2 1.3 2.6 34.2 5.5 — 0.5 5.8 49.9 — 49.9 24.6 44.4 459.3 — 46.7 — 57.5 169.9 777.8 6.4 3,439.0 $ — 2,574.6 $ 6.4 858.7 $ 18.0 $ 1.7 $ 16.3 $ 71.6 89.6 $ — 1.7 $ 71.6 87.9 $ $ $ $ — — — — — — — — — — — — — — 5.7 — — — — 5.7 — 5.7 — — — There were no material transfers between levels and there was no significant activity within Level 3 instruments during the periods presented. The fair values of any financial instruments presented above exclude the impact of netting assets and liabilities when a legally enforceable master netting agreement exists. Available-for-sale Securities Long-term investments generally mature within 5 years. Proceeds from sales of available-for-sale securities were $999.7 million, $680.7 million, and $600.6 million for fiscal years 2017, 2016 and 2015, respectively. Realized gains and losses on sales and maturities of available-for-sale securities were not material for fiscal years 2017, 2016, and 2015. Gross unrealized holding gains and losses on available-for-sale securities were not material as of October 1, 2017 and October 2, 2016. 68 Starbucks Corporation 2017 Form 10-K TT Trading Securities P Trading securities include equity mutual funds and exchange-traded funds. Our trading securities portfolio approximates a T portion of our liability under our Management Deferred Compensation Plan (“MDCP”), a defined contribution plan. Our MDCP liability was net unrealized holding gains and losses in the trading securities portfolio included in earnings for fiscal years 2017 and 2016 were net gains of $10.5 million and $3.6 million and a net loss of $4.5 million in fiscal year 2015. Gross unrealized holding gains and losses on trading securities were not material as of October 1, 2017 and October 2, 2016. $105.9 million and $101.5 million as of October 1, 2017 and October 2, 2016, respectively. The changes in Derivative Assets and Liabilities Derivative assets and liabilities include foreign currency forward contracts, commodity futures contracts, collars and swaps, which are described further in Note 3, Derivative Financial Instruments. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis VV Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property, plant and equipment, goodwill and other intangible assets, equity and cost method investments, and other assets. These assets are measured at fair value if determined to be impaired. Impairment of property, plant, and equipment is included at Note 1, Summary of Significant Accounting Policies. yy yy Other than the impairments discussed in Note 8, Other Intangible Assets and Goodwill, and the aforementioned fair value adjustments, there were no other material fair value adjustments during fiscal 2017 and 2016. Fair Value of Other Financial Instruments VV The estimated fair value of our long-term debt based on the quoted market price (Level 2) is included at Note 9, Debt. Note 5: Inventories (in millions) Coffee: Unroasted Roasted Other merchandise held for sale Packaging and other supplies Total Oct 1, 2017 Oct 2, 2016 $ $ 541.0 $ 301.1 301.1 220.8 561.6 300.4 308.6 207.9 1,364.0 $ 1,378.5 Other merchandise held for sale includes, among other items, serveware and tea. Inventory levels vary due to seasonality,yy commodity market supply and price fluctuations. ff yy As of October 1, 2017, we had committed to purchasing green coffee totaling $860 million under fixed-price contracts and an estimated $336 million under price-to-be-fixed contracts. As of October 1, 2017, none of our price-to-be-fixed contracts were effectively fixed through the use of futures contracts. Price-to-be-fixed contracts are purchase commitments whereby the ff quality, quantity yy , delivery period and other negotiated terms are agreed upon, but the date, and therefore the price, at which the base “C” coffee commodity price component will be fixed has not yet been established. For most contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. For other contracts, Starbucks and the seller may agree upon pricing parameters determined by the base “C” coffee commodity price. Until prices are fixed, we estimate the total cost of these purchase commitments. We believe, based on relationships established with our suppliers in the past, the risk of non-delivery on these purchase commitments is remote. WW ff ff ff Starbucks Corporation 2017 Form 10-K 69 Note 6: Equity and Cost Investments (in millions) Equity method investments Cost method investments Total Equity Method Investments Oct 1, 2017 Oct 2, 2016 $ $ 432.8 48.8 481.6 $ $ 305.7 48.8 354.5 As of October 1, 2017, we had a 50% ownership interest in each of the following international equity method investees: TT ff fee Korea Co., Ltd.; President Starbucks Cof fee Corporation (T ff President Starbucks Coffee (East China); Starbucks Cof These international entities operate licensed Starbucks® retail stores. We WW Company Limited; and Tata Starbucks Limited (India). further describe the pending transactions to acquire East China and to divest Taiwan in Note 15, Commitments and Contingencies. aiwan) ff TT TT We also license the rights to produce and distribute Starbucks-branded products to our WW , which develops and distributes bottled Starbucks American Coffee Partnership with the Pepsi-Cola Company yy including Frappuccino® coffee drinks, Starbucks Doubleshot ® espresso drinks, Starbucks Refreshers® beverages, and Starbucks® Iced Espresso Classics. 50% owned joint venture, The North ® beverages, ff ff In the first quarter of fiscal 2016, we sold our 49% ownership interest in our Spanish joint venture, Starbucks Coffee España, S.L. (“Starbucks Spain”), to our joint venture partner, Sigla S.A. (Grupo Vips), for a total purchase price of $30.2 million. This transaction resulted in an insignificant pre-tax gain, which was included in interest income and other , net on our consolidated statements of earnings. VV ff t ff Our share of income and losses from our equity method investments is included in income from equity investees on our consolidated statements of earnings. Also included in this line item is our proportionate share of gross profit resulting from coffee and other product sales to, and royalty and license fee revenues generated from, equity investees. Revenues generated from these related parties were $187.3 million, $164.2 million, and $153.4 million in fiscal years 2017, 2016 and 2015, respectively. Related costs of sales were $109.3 million, $97.5 million, and $94.5 million in fiscal years 2017, 2016 and 2015, respectively. As of October 1, 2017 and October 2, 2016, there were $54.3 million and $55.7 million of accounts receivable from equity investees, respectively, on our consolidated balance sheets, primarily related to product sales and royalty revenues. yy Cost Method Investments As of October 1, 2017 and October 2, 2016, we had $23 million invested in equity interests of entities that develop and operate Starbucks® licensed stores in several global markets. We have the ability to acquire additional interests in some of these cost method investees at certain intervals. Depending on our total percentage ownership interest and our ability to exercise significant influence over financial and operating policies, additional investments may require application of the equity method of accounting. WW Note 7: Supplemental Balance Sheet Information (in millions) Property, Plant and Equipment, net yy Land Buildings Leasehold improvements Store equipment Roasting equipment Furniture, fixtures and other Work in progress Property, plant and equipment, gross Accumulated depreciation Property, plant and equipment, net 70 Starbucks Corporation 2017 Form 10-K Oct 1, 2017 Oct 2, 2016 $ 46.9 $ 481.7 6,401.0 2,110.7 619.8 1,514.1 409.8 11,584.0 (6,664.5) 4,919.5 $ $ 46.6 458.4 5,892.9 1,931.7 605.4 1,366.9 271.4 10,573.3 (6,039.5) 4,533.8 Accrued Liabilities Accrued compensation and related costs Accrued occupancy costs Accrued taxes Accrued dividends payable Accrued capital and other operating expenditures Total accrued liabilities Note 8: Other Intangible r Assets and Goodwill Indefinite-Lived Intangible Assets (in millions) Trade names, trademarks and patents Other indefinite-lived intangible assets Total indefinite-lived intangible assets Oct 1, 2017 Oct 2, 2016 524.5 $ 151.3 226.6 429.5 602.6 510.8 137.5 368.4 365.1 617.3 1,934.5 $ 1,999.1 Oct 1, 2017 Oct 2, 2016 212.1 15.1 227.2 $ $ 207.8 15.1 222.9 $ $ $ $ Additional disclosure regarding changes in our intangible assets due to acquisitions is included at Note 2, Acquisitions and Divestitures. Goodwill Changes in the carrying amount of goodwill by reportable operating segment (in millions): Goodwill balance at September 27, 2015 $ 211.2 Americas China/ Asia Pacific 804.1 $ Acquisition/(divestiture) Other — 0.4 Goodwill balance at October 2, 2016 $ 211.6 $ Acquisition/(divestiture) Impairment Other — — 1.5 Goodwill balance at October 1, 2017 $ 213.1 $ — 140.8 944.9 (7.6) — (87.1) 850.2 EMEA 57.4 (2.6) 0.3 Channel Development 23.8 $ All Other Segments 478.9 $ Total $ 1,575.4 — — 5.3 — 2.7 141.5 55.1 $ 23.8 $ 484.2 — (17.9) — — — — — (69.3) — 37.2 $ 23.8 $ 414.9 $ 1,719.6 (7.6) (87.2) (85.6) $ 1,539.2 $ $ $ “Other” primarily consists of changes in the goodwill balance as a result of foreign currency translation. TT TT TT During the third quarter of fiscal 2017, management finalized its long-term strategy for the Teavana reporting unit. The plan emphasizes sales of premium Teavana™ tea products at Starbucks branded stores and, to a lesser extent, consumer product channels. The existing portfolio of Teavana-branded retail stores are expected to be closed over the next several quarters. change in strategic direction triggered an impairment test first of the retail store assets and then an impairment test of the goodwill asset, which also coincided with our annual goodwill testing process. For goodwill, we utilized a combination of income and market approaches to determine the implied fair value of the reporting unit. These approaches used primarily unobservable inputs, including discount, sales growth and royalty rates and valuation multiples of a selection of similar publicly traded companies, which are considered Level 3 fair value measurements. We then compared the implied fair value with the carrying value and recognized a goodwill impairment charge of $69.3 million, thus reducing goodwill of the Teavana reporting unit to $398.3 million as of October 1, 2017. The remaining intangible assets for the Teavana reporting unit of $117.2 million, consisting primarily of the indefinite-lived tradename and finite-lived tea recipes, were also tested, and no impairment losses were recorded. This WW TT TT The ongoing impact of the macro economic challenges we have experienced in our EMEA company-owned markets and the continued strength of the Swiss franc, when compared to the relatively inexpensive euro in surrounding countries, have posed strong headwinds to our Switzerland retail reporting unit. Our latest mitigation efforts incorporated into our Level 3 fair value A ff Starbucks Corporation 2017 Form 10-K 71 calculation 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 on consumer behavior and tourism. As a result, we recorded a goodwill impairment charge of $17.9 million in the third quarter of fiscal 2017, and, as of October 1, 2017, we had approximately $37 million of goodwill remaining on our condensed consolidated balance sheet associated with this reporting unit. Finite-Lived Intangible Assets (in millions) Gross Carrying Amount Acquired and reacquired rights $ 328.8 Acquired trade secrets and processes Trade names, trademarks and patents Licensing agreements Other finite-lived intangible assets 27.6 31.5 14.4 6.7 Oct 1, 2017 Oct 2, 2016 Net Carrying Amount Gross Carrying Amount 174.6 $ 361.3 13.9 13.9 10.6 1.2 27.6 29.4 16.0 7.2 Accumulated Amortization $ (154.2) $ (13.7) (17.6) (3.8) (5.5) (194.8) $ Accumulated Amortization $ Net Carrying Amount (114.5) $ (11.0) (15.2) (2.8) (4.6) (148.1) $ 246.8 16.6 14.2 13.2 2.6 293.4 Total finite-lived intangible assets $ 409.0 $ 214.2 $ 441.5 $ Amortization expense for finite-lived intangible assets was $57.5 million, $57.3 million, and $50.0 million during fiscal 2017, 2016 and 2015, respectively. Estimated future amortization expense as of October 1, 2017 (in millions): Fiscal Year Endingg 2018 2019 2020 2021 2022 Thereafter Total estimated future amortization expense $ $ 55.7 54.5 54.3 31.4 8.0 10.3 214.2 Additional disclosure regarding changes in our intangible assets due to acquisitions is included at Note 2, Acquisitions and Divestitures. Note 9: Debt Revolving Credit Facility and Commercial Paper Program Our $1.5 billion unsecured, revolving credit facility with various banks, of which $150 million may be used for issuances of letters of credit, is available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases, and is currently set to mature on November 6, 2020. Starbucks has the option, subject to negotiation and agreement with the related banks, to increase the maximum commitment amount by an additional $750 million. Borrowings under the credit facility will bear interest at a variable rate based on LIBOR, and, for 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 credit agreement. The current applicable margin is 0.565% for Eurocurrency Rate Loans and 0.00% (nil) for Base Rate Loans. The credit facility contains provisions requiring us to maintain compliance with certain covenants, including a minimum fixed charge coverage ratio, which measures our ability to cover financing expenses. As of October 1, 2017, we were in compliance with all applicable covenants. No amounts were outstanding under our credit facility as of October 1, 2017. r r Under our commercial paper program, we may issue unsecured commercial paper notes up to a maximum aggregate amount outstanding at any time of $1 billion, with individual maturities that may vary but not exceed 397 days from the date of issue. Amounts outstanding under the commercial paper program are required to be backstopped by available commitments under our credit facility 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, availability under our commercial paper 72 Starbucks Corporation 2017 Form 10-K program was approximately $0 billion (which represents the full committed credit facility amount, as no amounts were outstanding under our commercial paper program). In the first quarter of fiscal 2018 we entered into a new credit facility and commercial paper program. See Note 18, Subsequent Events for further detail. Long-term Debt 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, of which ¥81 billion has been designated to hedge the foreign currency exposure of our net investment in Japan. Interest on the 2024 notes is payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2017. ff In December 2016, we repaid the $400 million of 0.875% Senior Notes (the “2016 notes”) at maturity. In May 2016, we issued long-term debt in an underwritten registered public offering, which consisted of $500 million of 10- year 2.450% Senior Notes (the “2026 notes”) due June 2026. Interest on the 2026 notes is payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2016. ff In February 2016, we issued long-term debt in an underwritten registered public offering, which consisted of $500 million of 5- year 2.100% Senior Notes (the “2021 notes”) due February 2021. In May 2016, we reopened this offering with the same terms and issued an additional $250 million of Senior Notes (collectively, the “2021 notes”) for an aggregate amount outstanding of $750 million. Interest on the 2021 notes is payable semi-annually on February 4 and August 4 of each year, commencing on August 4, 2016. yy ff ff In July 2015, we redeemed $550 million of 6.250% Senior Notes (the “2017 notes”) originally scheduled to mature in August 2017. The redemption resulted in a charge of $61.1 million, which is presented separately as loss on extinguishment of debt within other income and expenses on our consolidated statements of earnings. This loss primarily relates to the optional redemption payment as outlined in the 2017 notes indenture, as well as non-cash expenses related to the previously capitalized original issuance costs and accelerated amortization of the unamortized discount. In connection with the redemption, we also reclassified $2.0 million from accumulated other comprehensive income to interest expense on our consolidated statements of earnings related to remaining unrecognized losses from interest rate contracts entered into in conjunction with the 2017 notes and designated as cash flow hedges. In June 2015, we issued long-term debt in an underwritten registered public offering, which consisted of 2.700% Senior Notes (the “2022 notes”) due June 2022, and $350 million of 30-year 4.300% Senior Notes (the “2045 notes”) due June 2045. Interest on the 2022 and 2045 notes is payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2015. $500 million of 7-year ff Starbucks Corporation 2017 Form 10-K 73 Components of long-term debt including the associated interest rates and related fair values by calendar maturity (in millions, rr except interest rates) : Issuance 2016 notes 2018 notes 2021 notes 2021 notes 2022 notes 2023 notes 2024 notes(2) 2026 notes 2045 notes Total Aggregate debt issuance costs and unamortized premium/ (discount), net Hedge accounting fair value adjustment(3) Total Oct 1, 2017 Oct 2, 2016 Face Value Estimated Fair Value Face Value Estimated Fair Value Stated Interest Rate $ — $ — $ 400.0 $ 350.0 500.0 250.0 500.0 750.0 755.3 500.0 350.0 352 501 250 508 806 760 481 381 350.0 500.0 250.0 500.0 750.0 — 500.0 350.0 400 357 511 255 526 839 — 509 417 0.875% 2.000% 2.100% 2.100% 2.700% 3.850% 0.372% 2.450% 4.300% Effective Interest Rate (1) 0.941% 2.012% 2.293% 1.600% 2.819% 2.859% 0.462% 2.511% 4.348% 3,955.3 4,039 3,600.0 3,814 (17.5) (5.2) (14.8) — $ 3,932.6 $ 3,585.2 (1) Includes the effects of the amortization of any premium or discount and any gain or loss upon settlement of related treasury ff locks or forward-starting interest rate swaps utilized to hedge the interest rate risk prior to the debt issuance. (2) Japanese yen-denominated long-term debt. (3) Amount represents the change in fair value due to changes in benchmark interest rates related to our 2023 notes. Refer to Note 3, Derivative Financial Instruments, for additional information on our interest rate swap designated as a fair value hedge. The indentures under which the above notes were issued also 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 2, 2017, we were in compliance with each of these covenants. The following table summarizes our long-term debt maturities as of October 1, 2017 by fiscal year (in millions): Fiscal Year 2018 2019 2020 2021 2022 Thereafter Total Total — 350.0 — 750.0 500.0 2,355.3 3,955.3 $ $ Note 10: Leases Rent expense under operating lease agreements (in millions): Fiscal Year Ended Minimum rent Contingent rent Total 74 Starbucks Corporation 2017 Form 10-K Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ $ 1,185.7 143.5 1,329.2 $ $ 1,092.5 130.7 1,223.2 $ $ 1,026.3 111.5 1,137.8 Minimum future rental payments under non-cancelable operating leases and lease financing arrangements as of October 1, 2017 (in millions): Fiscal Year Endingg 2018 2019 2020 2021 2022 Thereafter Total minimum lease payments Operating Leases 1,213.1 1,141.6 1,068.6 986.9 888.1 3,315.2 8,613.5 $ $ Lease Financing Arrangements 4.1 $ 4.1 4.1 4.0 3.9 38.9 59.1 $ We have subleases related to certain of our operating leases. During fiscal WW income of $15.5 million, $14.6 million, and $11.9 million, respectively. Additionally, as of October 1, 2017 and October 2, 2016, the gross carrying values of assets related to build-to-suit lease arrangements accounted for as financing leases were $94.3 million and $92.7 million, respectively, with associated accumulated depreciation of yy respectively. Lease exit costs associated with our restructuring efforts will be recognized concurrently with actual store closures. Total lease exit costs are expected to be approximately restructuring and impairments on the consolidated statement of earnings in fiscal 2017. ff $153.7 million of which $15.7 million were recorded within 2017, 2016 and 2015, we recognized sublease $9.0 million and $6.2 million, TT yy Note 11: Equity In addition to 2.4 billion shares of authorized common stock with $0.001 par value per share, we have authorized 7.5 million shares of preferred stock, none of which was outstanding at October 1, 2017. 37.5 million shares of common stock at a total cost of $2.1 billion, and 34.9 million shares at a total cost of We repurchased WW $2.0 billion for the years ended October 1, 2017 and October 2, 2016, respectively. As of October 1, 2017, 80.3 million shares remained available for repurchase under current authorizations. Comprehensive Income Comprehensive income includes all changes in equity during the period, except those resulting from transactions with our shareholders. Comprehensive income is comprised of net earnings and other comprehensive income. Accumulated other comprehensive income reported on our consolidated balance sheets consists of foreign currency translation adjustments and other and the unrealized gains and losses, net of applicable taxes, on available-for-sale securities and on derivative instruments designated and qualifying as cash flow and net investment hedges. Changes in accumulated other comprehensive income (“AOCI”) by component, for the years ended October 1, 2017, October 2, 2016, and September 27, 2015, net of tax,a re as follows: (in millions) October 1, 2017 Net gains/(losses) in AOCI, beginning of period Net gains/(losses) recognized in OCI before reclassifications Net (gains)/losses reclassified from AOCI to earnings Other comprehensive income/(loss) attributable to Starbucks Available- for-Sale Securities Cash Flow Hedges Net Investment Hedges Translation Adjustment and Other Total $ 1.1 $ 10.9 $ 1.3 $ (121.7) $ (108.4) (6.6) 3.0 (3.6) 40.6 (55.6) (15.0) 12.7 — 12.7 (40.7) (0.6) (41.3) 6.0 (53.2) (47.2) Net gains/(losses) in AOCI, end of period $ (2.5) $ (4.1) $ 14.0 $ (163.0) $ (155.6) Starbucks Corporation 2017 Form 10-K 75 (in millions) October 2, 2016 Available- for-Sale Securities Cash Flow Hedges Net Investment Hedges Translation Adjustment and Other Total Net gains/(losses) in AOCI, beginning of period $ (0.1) $ 25.6 $ 1.3 $ (226.2) $ (199.4) Net gains/(losses) recognized in OCI before reclassifications Net (gains)/losses reclassified from AOCI to earnings Other comprehensive income/(loss) attributable to Starbucks Net gains/(losses) in AOCI, end of period $ 2.2 (1.0) (82.1) 67.4 1.2 1.1 $ (14.7) 10.9 $ — — — 1.3 104.5 — 24.6 66.4 104.5 (121.7) $ 91.0 (108.4) $ (in millions) September 27, 2015 Available- for-Sale Securities Cash Flow Hedges Net Investment Hedges Translation Adjustment and Other Total Net gains/(losses) in AOCI, beginning of period $ (0.4) $ 46.3 $ 3.2 $ (23.8) $ 25.3 Net gains/(losses) recognized in OCI before reclassifications Net (gains)/losses reclassified from AOCI to earnings Other comprehensive income/(loss) attributable to Starbucks Purchase of noncontrolling interest Net gains/(losses) in AOCI, end of period $ 0.9 30.8 2.7 (185.6) (151.2) (0.6) (51.5) 0.3 — (0.1) $ (20.7) — (4.6) (1.9) — 14.3 (42.4) (171.3) (31.1) (226.2) $ (193.6) (31.1) (199.4) 25.6 $ 1.3 $ Impact of reclassifications from AOCI on the consolidated statements of earnings (in millions): AOCI Components Gains/(losses) on available-for-sale securities Gains/(losses) on cash flow hedges Interest rate hedges Cross-currency swaps Foreign currency hedges Foreign currency/coffee hedges Gains/(losses) on net investment hedges(1) TT Translation adjustment (2) Starbucks Japan Other Amounts Reclassified from AOCI Fiscal Year Ended Oct 1, 2017 $ (4.1) $ Oct 2, 2016 1.6 Sep 27, 2015 1.0 $ Affected Line Item in the Statements of Earnings Interest income and other, net 4.8 57.2 3.0 5.7 — — 0.6 67.2 5.0 (101.1) 4.9 11.4 — 3.2 Interest expense 46.2 Interest income and other, net 14.0 Revenue 8.6 Cost of sales including occupancy costs 7.2 Gain resulting from acquisition of joint venture — (7.2) Gain resulting from acquisition of joint — (78.2) (14.0) 53.2 $ 11.8 (66.4) $ $ venture Interest income and other, net (7.1) 65.9 Total before tax (23.5) Tax (expense)/benefit 42.4 Net of tax (1) Release of pretax cumulative net gains in AOCI related to our net investment derivative instruments used to hedge our preexisting 39.5% equity method investment in Starbucks Japan. (2) Release of cumulative translation adjustments to earnings upon sale or liquidation of foreign business. 76 Starbucks Corporation 2017 Form 10-K Note 12: Employee Stock and Benefit Plans We maintain several equity incentive plans under which we may grant non-qualified stock options, incentive stock options, WW restricted stock, restricted stock units (“RSUs”) or stock appreciation rights to employees, non-employee directors and consultants. We issue new shares of common stock upon exercise of stock options and the vesting of RSUs. employee stock purchase plan (“ESPP”). WW We also have an WW As of October 1, 2017, there were 73.5 million shares of common stock available for issuance pursuant to future equity-based compensation awards and 13.3 million shares available for issuance under our ESPP.PP Stock-based compensation expense recognized in the consolidated financial statements (in millions): Fiscal Year Ended Options RSUs Total stock-based compensation expense recognized in the consolidated statements of earnings Total related tax benefit Total capitalized stock-based compensation included in net property, plant and equipment and inventories on the consolidated balance sheets Stock Option Plans Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 44.3 $ 131.7 176.0 57.6 $ $ 42.7 $ 175.4 218.1 73.0 $ $ 37.8 172.0 209.8 72.3 1.9 $ 1.5 $ 1.9 $ $ $ $ Stock options to purchase our common stock are granted at the fair value of the stock on the grant date. The majority of options become exercisable in four equal installments beginning a year from the grant date and generally expire 10 years from the grant date. Options granted to non-employee directors generally vest over one to three years. All outstanding stock options are non- qualified stock options. The fair value of stock option awards was estimated at the grant date with the following weighted average assumptions for fiscal years 2017, 2016 and 2015: Fiscal Year Ended Expected term (in years) Expected stock price volatility Risk-free interest rate Expected dividend yield Weighted average grant price Estimated fair value per option granted Employee Stock Options Granted During the Period 2017 2016 2015 3.9 21.6% 1.5% 1.8% 3.9 23.9% 1.2% 1.3% $ $ 56.12 8.56 $ $ 60.20 10.54 $ $ 4.2 22.3% 1.1% 1.6% 39.89 6.58 The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on a combination of historical volatility of our stock and the one-year implied volatility of Starbucks traded options, for the related vesting periods. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The dividend yield assumption is based on our anticipated cash dividend payouts. The amounts shown above for the estimated fair value per option granted are before the estimated effect of forfeitures, which reduce the amount of expense recorded in the consolidated statements of earnings. T ff Starbucks Corporation 2017 Form 10-K 77 : Stock option transactions for the year ended October 1, 2017 (in millions, except per share and contractual life amounts) rr Outstanding, October 2, 2016 Granted Exercised Expired/forfeited Outstanding, October 1, 2017 Exercisable, October 1, 2017 Vested and expected to vest, October 1, 2017 Shares Subject to Options Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value $ 31.3 7.1 (5.3) (1.7) 31.4 19.7 30.0 30.59 56.12 23.16 51.13 36.51 26.42 35.60 5.8 $ 771 5.8 4.2 5.6 589 552 587 The aggregate intrinsic value in the table above, which is the amount by which the market value of the underlying stock exceeded the exercise price of outstanding options, is before applicable income taxes and represents the amount optionees would have realized if all in-the-money options had been exercised on the last business day of the period indicated. As of October 1, 2017, total unrecognized stock-based compensation expense, net of estimated forfeitures, related to nonvested options was approximately $38 million, before income taxes, and is expected to be recognized over a weighted average period of approximately 2.7 years. The total intrinsic value of options exercised was $181 million, $254 million, and $358 million during fiscal years 2017, 2016 and 2015, respectively. The total fair value of options vested was $40 million, $37 million, and $36 million during fiscal years 2017, 2016 and 2015, respectively. RSUs We have both time-vested and performance-based RSUs. WW employee directors and entitle the grantee to receive shares of common stock at the end of a vesting period, subject solely to the employee’s continuing employment or the non-employee director's continuing service. The majority of time-vested RSUs vest in two equal annual installments beginning a year from the grant date. Our performance-based RSUs are awarded to eligible employees and entitle the grantee to receive shares of common stock if we achieve specified performance goals during the performance period and the grantee remains employed during the subsequent vesting period. The majority of performance- based RSUs vest in two equal annual installments beginning two years from the grant date. Time-vested RSUs are awarded to eligible employees and non- : RSU transactions for the year ended October 1, 2017 (in millions, except per share and contractual life amounts) rr Nonvested, October 2, 2016 Granted Vested Forfeited/canceled Nonvested, October 1, 2017 Number of Shares Weighted Average Grant Date Fair Value per Share Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value $ 8.3 5.1 (4.3) (1.5) 7.6 46.15 54.30 42.09 51.05 52.06 0.9 $ 448 0.9 410 For fiscal 2016 and 2015, the weighted average fair value per RSU granted was $58.81 and $38.56, respectively. As of f i i October 1, 2017, total unrecogniz d was approximately $75 million, before income taxes, and is expected to be recognized over a weighted average period of l approximately 2.0 years. The total fair value of RSUs vested was $182 million, $169 million and $137 million during fiscal years 2017, 2016 and 2015, respectively. ed stock-based compensation expense related to nonvested RSUs, net of estimated forfeitures, k b d f d d d f i l i ESPP P Our ESPP allows eligible employees to contribute up to common stock, subject to an annual maximum dollar amount. The purchase price is 95% of the fair market value of the stock 0.5 million in fiscal on the last business day of the quarterly offering period. 2017. 10% of their base earnings toward the quarterly purchase of our The number of shares issued under our ESPP was P ff 78 Starbucks Corporation 2017 Form 10-K Deferred Compensation Plan We have a Deferred Compensation Plan for Non-Employee Directors under which non-employee directors may yy , for any fiscal WW year, irrevocably elect to defer receipt of shares of common stock the director would have received upon vesting of restricted stock units. The number of deferred shares outstanding related to deferrals made under this plan is not material. Defined Contribution Plans WW We maintain voluntary defined contribution plans, both qualified and non-qualified, covering eligible employees as defined in the plan documents. Participating employees may elect to defer and contribute a portion of their eligible compensation to the plans up to limits stated in the plan documents, not to exceed the dollar amounts set by applicable laws. Our matching contributions to all U.S. and non-U.S. plans were $101.4 million, $86.2 million and $70.9 million in fiscal years 2017, 2016 and 2015, respectively. Note 13: Income Taxes TT Components of earnings before income taxes (in millions): Fiscal Year Ended United States Foreign Total earnings before income taxes Provision/(benefit) for income taxes (in millions): Fiscal Year Ended Current taxes: U.S. federal U.S. state and local Foreign Total current taxes Deferred taxes: U.S. federal U.S. state and local Foreign Total deferred taxes Total income tax expense Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ $ 3,393.0 924.5 4,317.5 $ $ 3,415.7 782.9 4,198.6 $ $ 2,837.2 1,065.8 3,903.0 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ 931.0 $ 704.1 $ 170.8 216.6 1,318.4 121.2 14.2 (21.2) 114.2 166.5 218.5 1,089.1 351.3 25.8 (86.5) 290.6 801.0 150.1 172.2 1,123.3 56.5 4.0 (40.1) 20.4 $ 1,432.6 $ 1,379.7 $ 1,143.7 Reconciliation of the statutory U.S. federal income tax rate with our effective income tax rate: ff Fiscal Year Ended Statutory rate State income taxes, net of federal tax benefit Benefits and taxes related to foreign operations Domestic production activity deduction Gain resulting from acquisition of joint venture Other, net Effective tax rate Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 35.0% 2.8 (2.8) (1.8) — — 33.2% 35.0% 3.0 (2.2) (1.9) — (1.0) 32.9% 35.0% 2.8 (2.1) (2.2) (3.7) (0.5) 29.3% U.S. income and foreign withholding taxes have not been provided on approximately $3.7 billion of cumulative undistributed earnings of foreign subsidiaries and equity investees, including cumulative unrealized currency translation adjustments. We WW intend to reinvest these earnings for the foreseeable future. If these amounts were distributed to the U.S., in the form of Starbucks Corporation 2017 Form 10-K 79 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 of the complexities with its hypothetical calculation, and the amount of liability, if any yy , is dependent on circumstances existing if and when remittance occurs. yy Tax ef ff fect of temporary dif ferences and carryforwards that comprise significant portions of deferred tax assets and liabilities ff TT millions): (in Oct 1, 2017 Oct 2, 2016 Deferred tax assets: Property, plant and equipment Accrued occupancy costs Accrued compensation and related costs Stored value card liability Stock-based compensation Net operating losses Litigation charge Other Total Valuation allowance Total deferred tax asset, net of valuation allowance Deferred tax liabilities: Property, plant and equipment Intangible assets and goodwill Other Total Net deferred tax asset Reported as: Deferred income tax assets Deferred income tax liabilities (included in Other long-term liabilities) Net deferred tax asset $ 71.3 $ 118.0 95.0 130.7 125.9 80.8 792.0 180.8 1,594.5 (80.1) 1,514.4 $ $ (477.2) (159.0) (89.1) (725.3) 789.1 795.4 (6.3) 789.1 $ $ $ $ $ $ 56.8 104.5 88.6 124.2 138.3 79.0 862.3 197.4 1,651.1 (70.3) 1,580.8 (445.7) (175.9) (88.5) (710.1) 870.7 885.4 (14.7) 870.7 The valuation allowance as of October 1, 2017 and October 2, 2016 is primarily related to net operating losses and other deferred tax assets of consolidated foreign subsidiaries. As of October 1, 2017, we had state net operating loss carryforwards of $31.2 million which will begin to expire in fiscal 2024, state tax credit carryforwards of $18.0 million, of which $15.9 million will begin to expire in fiscal 2024 and the remainder will begin to expire in fiscal 2018, and foreign net operating loss carryforwards of $262.2 million, of which $207.3 million have an indefinite carryforward period and the remainder expire at various dates starting from fiscal 2018. TT Uncertain Tax Positions As of October 1, 2017, we had $196.9 million of gross unrecognized tax benefits of which $139.5 million, if recognized, would affect our ef $3.6 million and an expense of $0.7 million expense of $5.2 million, a benefit of ff fective tax rate. ff of interest and penalties in income tax expense, prior to the benefit of the federal tax deduction, for fiscal 2017, 2016 and 2015, respectively. As of October 1, 2017 and October 2, 2016, we had accrued interest and penalties of $11.2 million and $7.7 million, respectively, within our consolidated balance sheets. WW We recognized an yy t 80 Starbucks Corporation 2017 Form 10-K The following table summarizes the activity related to our unrecognized tax benefits (in millions): Beginning balance Increase related to prior year tax positions Decrease related to prior year tax positions Increase related to current year tax positions Decrease related to current year tax positions Decreases related to settlements with taxing authorities Decrease related to lapsing of statute of limitations Ending balance Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 146.5 10.4 — 41.3 — — (1.3) 196.9 $ 150.4 $ 112.7 — (23.6) 33.7 — (3.1) (10.9) 146.5 $ 7.9 (0.9) 32.0 (0.6) (0.7) — $ 150.4 $ $ We are currently under examination, or may be subject to examination, by various U.S. federal, state, local and foreign tax WW jurisdictions for fiscal years 2006 through 2016. We are no longer subject to U.S. federal or state examination for years prior to fiscal year 2011, with the exception of one state. We are no longer subject to examination in any material international markets prior to 2006. WW WW It is reasonably possible that a portion of the Company's gross unrecognized tax benefits may be recognized by the end of fiscal 2018 as a result of a lapse of the statute of limitations or resolution of examinations with tax authorities. We estimate this range to be approximately $42 million to $75 million. WW e Note 14: Earnings per Shar r Calculation of net earnings per common share (“EPS”) — basic and diluted (in millions, except EPS): Fiscal Year Ended Net earnings attributable to Starbucks Weighted average common shares outstanding (for basic calculation) Dilutive effect of outstanding common stock options and RSUs Weighted average common and common equivalent shares outstanding (for diluted calculation) EPS — basic EPS — diluted Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 2,884.7 $ 2,817.7 $ 2,757.4 1,449.5 12.0 1,461.5 1,471.6 15.1 1,486.7 1.99 1.97 $ $ 1.91 1.90 $ $ 1,495.9 17.5 1,513.4 1.84 1.82 $ $ $ Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and non-vested) and unvested RSUs, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options’ exercise prices were greater than the average market price of our common shares for the period) because their inclusion would have been antidilutive. We had 11.4 million and 5.4 million out-of-the-money stock options as of October 1, 2017 and October 2, 2016, respectively. There were no out-of-the- money stock options as of September 27, 2015. WW Note 15: Commitments and Contingencies Contractual Commitments In the fourth quarter of fiscal 2017, we signed an agreement to acquire the remaining 50% ownership of our East China joint venture from Uni-President Enterprises Corporation (“UPEC”) and President Chain Store Corporation (“PCSC”) for approximately $1.3 billion to unify our business operations across mainland China. The acquisition will convert these licensed stores to company-operated stores and is expected to close by early calendar year 2018, subject to regulatory approval and customary closing conditions. Concurrently, with the purchase of our East China joint venture, UPEC and PCSC will assume 100% ownership of Starbucks operations in Taiwan by acquiring our Limited for approximately $175 million. The sale is also expected to close by early calendar year 2018. 50% interest in President Starbucks Coffee TT Taiwan TT yy ff Legal Proceedings Starbucks is party to various other legal proceedings arising in the ordinary course of business, including, at times, certain employment litigation cases that have been certified as class or collective actions, but is not currently a party to any legal Starbucks Corporation 2017 Form 10-K 81 proceeding that management believes could have a material adverse effect on our consolidated financial position, results of operations or cash flows. ff Note 16: Segment Reporting Our chief executive officer and executive chairman comprise the Company's Chief Operating Decision Maker function (“CODM”). Segment information is prepared on the same basis that our CODM manages the segments, evaluates financial results, and makes key operating decisions. ff We have WW Pacific (“CAP”); 3) Europe, Middle East, and Africa (“EMEA”) and 4) Channel Development. four reportable operating segments: 1) Americas, inclusive of the U.S., Canada, and Latin America; 2) China/Asia r ff A Americas, CAP, and EMEA PP ff fee and other beverages, complementary food, packaged cof fees, single-serve ff operations sell cof Our Americas coffee products and a focused selection of merchandise through company-operated stores and licensed stores. segment is our most mature business and has achieved significant scale. Certain markets within our CAP and EMEA A operations are still in the early stages of development and require a more extensive support organization, relative to their current levels of revenue and operating income, than our Americas operations. The Americas, CAP and EMEA A foodservice accounts, primarily in Canada, Japan and the U.K. segments also include certain P P ® teas globally. Channel Development operations also produce and sell a variety of ready-to-drink beverages, Channel Development operations sell a selection of packaged coffees and single-serve products, as well as a selection of premium TazoTT ® espresso drinks, Starbucks Refreshers® beverages, Teavana™ tea such as Frappuccino® coffee drinks, Starbucks Doubleshot beverages and chilled multi-serve beverages. The U.S. foodservice business, which is included in the Channel Development segment, sells coffee and other related products to institutional foodservice companies. TT ff ff ff Consolidated revenue mix by product type (in millions): Fiscal Year Ended Beverage Food Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ 12,915.0 58% $ 12,383.4 58% $ 11,115.4 3,832.1 17% 3,495.0 16% 3,085.3 58% 16% Packaged and single-serve coffees and teas Other(1) Total (1) “Other” primarily consists of royalty and licensing revenues, beverage-related ingredients, serveware, and ready-to-drink beverages, among other items. 100% $ 19,162.7 100% $ 21,315.9 $ 22,386.8 2,342.1 2,619.9 2,571.5 2,866.0 2,756.1 2,883.6 14% 12% 13% 12% 14% 12% 100% Information by geographic area (in millions): Fiscal Year Ended Net revenues: United States Other countries Total Long-lived assets(1): United States Other countries Total Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ $ $ $ 16,527.1 5,859.7 22,386.8 5,848.3 3,234.0 9,082.3 $ $ $ $ 15,774.8 5,541.1 21,315.9 6,012.8 3,541.8 9,554.6 $ $ $ $ 14,123.7 5,039.0 19,162.7 5,795.2 2,639.9 8,435.1 (1) Long-lived assets for fiscal 2016 and fiscal 2015 have been adjusted for the adoption of new accounting guidance related to the reclassification of debt issuance costs as discussed in Note 1, Summary of Significant Accounting Policies. No customer accounts for 10% or more of our revenues. Revenues are shown based on the geographic location of our customers. Revenues from countries other than the U.S. consist primarily of revenues from Japan, Canada, China and the U.K., which together account for approximately 77% of net revenues from other countries for fiscal 2017. Management evaluates the performance of its operating segments based on net revenues and operating income. The accounting policies of the operating segments are the same as those described in Note 1, Summary of Significant Accounting Policies. 82 Starbucks Corporation 2017 Form 10-K Operating income represents earnings before other income and expenses and income taxes. Management does not evaluate the performance of its operating segments using asset measures. The identifiable assets by segment disclosed in this note are those assets specifically identifiable within each segment and include cash and cash equivalents, net property, plant and equipment, equity and cost investments, goodwill, and other intangible assets. Assets not attributed to reportable operating segments below are corporate assets and are primarily comprised of cash and cash equivalents available for general corporate purposes, investments, assets of the corporate headquarters and roasting facilities, and inventory. yy The table below presents financial information for our reportable operating segments and All Other Segments for the years ended October 1, 2017, October 2, 2016 and September 27, 2015. (in millions) Fiscal 2017 Total net revenues Americas China / Asia Pacific EMEA Channel Development All Other Segments Segment Total $ 15,652.7 $ 3,240.2 $ 1,013.7 $ 2,008.6 $ 471.6 $ 22,386.8 Depreciation and amortization expenses Income from equity investees Operating income/(loss) Total assets 615.0 — 3,663.2 3,327.2 202.2 197.0 765.0 2,770.9 31.3 — 116.1 273.8 2.2 194.4 893.4 114.0 10.1 — (174.3) 771.9 860.8 391.4 5,263.4 7,257.8 Fiscal 2016 Total net revenues $ 14,795.4 $ 2,938.8 $ 1,124.9 $ 1,932.5 $ 524.3 $ 21,315.9 Depreciation and amortization expenses Income from equity investees Operating income/(loss) Total assets 590.1 — 3,742.0 3,424.6 180.6 150.1 631.6 2,740.2 40.8 1.5 151.6 552.1 2.8 166.6 807.3 67.1 13.3 — (38.4) 861.1 827.6 318.2 5,294.1 7,645.1 Fiscal 2015 Total net revenues $ 13,293.4 $ 2,395.9 $ 1,216.7 $ 1,730.9 $ 525.8 $ 19,162.7 Depreciation and amortization expenses Income from equity investees Operating income/(loss) Total assets 522.3 — 3,223.3 2,726.7 150.7 119.6 500.5 2,230.5 52.0 3.1 168.2 749.1 2.7 127.2 653.9 87.3 16.3 — (24.8) 1,785.3 744.0 249.9 4,521.1 7,578.9 The following table reconciles total segment operating income in the table above to consolidated earnings before income taxes (in millions): Fiscal Year Ended Total segment operating income Unallocated corporate operating expenses Consolidated operating income Gain resulting from acquisition of joint venture Loss on extinguishment of debt Interest income and other, net Interest expense Earnings before income taxes Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 $ $ $ 5,263.4 (1,128.7) 4,134.7 — — 275.3 (92.5) 4,317.5 $ $ 5,294.1 (1,122.2) 4,171.9 — — 108.0 (81.3) 4,198.6 $ 4,521.1 (920.1) 3,601.0 390.6 (61.1) 43.0 (70.5) 3,903.0 Starbucks Corporation 2017 Form 10-K 83 Note 17: Selected Quarterly Financial Information (unaudited; in millions, except EPS) Fiscal 2017: Net revenues Operating income Net earnings attributable to Starbucks EPS — diluted Fiscal 2016(1): Net revenues Operating income Net earnings attributable to Starbucks EPS — diluted First Quarter Second Quarter Third Quarter Fourth Quarter Full Year $ 5,732.9 $ 5,294.0 $ 5,661.5 $ 5,698.3 $ 22,386.8 1,132.6 751.8 0.51 935.4 652.8 0.45 1,044.2 1,022.5 691.6 0.47 788.5 0.54 4,134.7 2,884.7 1.97 $ 5,373.5 $ 4,993.2 $ 5,238.0 $ 5,711.2 $ 21,315.9 1,058.0 687.6 0.46 864.2 575.1 0.39 1,022.3 1,227.5 754.1 0.51 801.0 0.54 4,171.9 2,817.7 1.90 (1) The fiscal year ended on October 2, 2016, included 53 weeks, with the 53rd week falling in our fourth fiscal quarter . d Note 18: Subsequent Events On October 25, 2017, we replaced our $1.5 billion 2016 credit facility with our new $2.0 billion unsecured 5-year revolving credit facility (the “2018 credit facility”), set to mature on October 25, 2022 and a $1.0 billion unsecured 364-Day credit facility (the “364-day credit facility”), set to mature on October 24, 2018. We have the option, subject to negotiation and agreement with the related banks, to increase either facility by an additional $500 million. WW On October 27, 2017 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. ® signature On November 2, 2017, we entered into an agreement to sell assets associated with our Tazo brand including recipes, intellectual property and inventory to Unilever for a total of $384.0 million. This transaction is subject to customary closing conditions, and Starbucks expects the closing date to occur in the first quarter of fiscal 2018. The transaction will result in a net gain and will be included in interest income and other, net on our consolidated statements of earnings. Results from TazoTT operations are currently reported primarily in Channel Development. TazoTT TT 84 Starbucks Corporation 2017 Form 10-K REPORTRR OF INDEPENDENT F REGISTERED PUBLIC ACCOUNTING FIRM TT To the Board of Directors and Shareholders of Starbucks Corporation WW Seattle, Washington We have audited the accompanying consolidated balance sheets of Starbucks Corporation and subsidiaries (the “Company”) as WW of October 1, 2017 and October 2, 2016, and the related consolidated statements of earnings, comprehensive income, equity,yy and cash flows for each of the three years in the period ended October 1, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company WW Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Accounting Oversight Board (United States). WW In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Starbucks Corporation and subsidiaries as of October 1, 2017 and October 2, 2016, and the results of their operations and their cash flows for each of the three years in the period ended October 1, 2017, in conformity with accounting principles generally accepted in the United States of America. yy We have also audited, in accordance with the standards of the Public Company WW the Company’s internal control over financial reporting as of October 1, 2017, based on criteria established in Internal Control — Integrated Framework (2013) and our report dated November 17, 2017 expressed an unqualified opinion on the Company’s internal control over financial reporting. issued by the Committee of Sponsoring Organizations of the Treadway Commission Accounting Oversight Board (United States), TT rr /s/ Deloitte & Touche LLP TT Seattle, Washington WW November 17, 2017 Starbucks Corporation 2017 Form 10-K 85 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in WW our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer , as appropriate to allow timely decisions regarding required disclosure. ff ff During the fourth quarter of fiscal 2017, we carried out an evaluation, under the supervision and with the participation of our ff management, including our chief executive officer and our chief financial of ficer operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. ficer concluded that our disclosure controls and Based upon that evaluation, our chief executive officer and chief financial of ff October 1, 2017). procedures were effective, as of the end of the period covered by this report ( , of the effectiveness of the design and ff ff ff ff There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that materially affected or are reasonably likely to materially ff affect internal control over financial reporting. ff The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2, respectively, yy to this 10-K. Report of Management on Internal Control over Financial Reporting r Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. ff Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control — Integrated Framework Committee of Sponsoring Organizations of the Treadway Commission. of controls, evaluation of the design effectiveness of controls, testing of the operating ef ff fectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that our internal control over financial reporting was ff effective as of This evaluation included review of the documentation (the “2013 Framework”), issued by the October 1, 2017. TT rr ff ff PP Our internal control over financial reporting as of October 1, 2017 has been audited by Deloitte & Touche LLP , an independent registered public accounting firm, as stated in their report which is included herein. TT 86 Starbucks Corporation 2017 Form 10-K REPORTRR OF INDEPENDENT F REGISTERED PUBLIC ACCOUNTING FIRM TT To the Board of Directors and Shareholders of Starbucks Corporation WW Seattle, Washington We have audited the internal control over financial reporting of Starbucks Corporation and subsidiaries (the “Company”) as of WW October 1, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of rr The Company’s management is responsible for maintaining effective Sponsoring Organizations of the Treadway Commission. internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. TT ff ff We conducted our audit in accordance with the standards of the Public Company WW Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Accounting Oversight Board (United States). WW ff ff ff yy s internal control over financial reporting is a process designed by, or under the supervision of, the company’ s A company’ A s fected by the company’ ff principal executive and principal financial officers, or persons performing similar functions, and ef board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’ s internal control over financial reporting includes those policies and procedures that (1) pertain to the A maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. ff Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. ff In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 1, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) of Sponsoring Organizations of the Treadway Commission. issued by the Committee ff rr TT We have also audited, in accordance with the standards of the Public Company WW the consolidated financial statements as of and for the fiscal year ended October 1, 2017, of the Company and our report dated November 17, 2017 expressed an unqualified opinion on those financial statements. Accounting Oversight Board (United States), /s/ Deloitte & Touche LLP TT Seattle, Washington WW November 17, 2017 Starbucks Corporation 2017 Form 10-K 87 Item 9B. Other Information None. 88 Starbucks Corporation 2017 Form 10-K Item 10. Directors, Executive Officers and Corporate Governance PART III Information regarding our executive officers is set forth in Item 1 of Part 1 of this Report under the caption “Executive Of ff ficers of the Registrant.” ff We adopted a code of ethics that applies to our chief executive of ff ficer WW and other finance leaders, which is a “code of ethics” as defined by applicable rules of the SEC. This code is publicly available on our website at www.starbucks.com/about-us/company-information/corporate-governance. If we make any amendments to this code other than technical, administrative or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of this code to our chief executive officer ff ff we will disclose the nature of the amendment or waiver, its effective date and to whom it applies on our website at www.starbucks.com/about-us/company-information/corporate-governance or in a report on Form 8-K filed with the SEC. , executive chairman, chief financial officer , , chief financial officer or controller ff , chief operating officer , controller ff ff The remaining information required by this item is incorporated herein by reference to the sections entitled “Proposal 1 — Election of Directors” and “Beneficial Ownership of Common Stock — Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance — Board Committees and Related Matters” and “Corporate Governance — Audit and Compliance Committee” in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held on March 21, 2018 (the “Proxy Statement”). Item 11. Executive Compensation The information required by this item is incorporated by reference to the sections entitled “Executive Compensation,” “Compensation of Directors,” “Corporate Governance — Compensation and Management Development Committee” and “Compensation Committee Report” in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters The information required by this item is incorporated by reference to the sections entitled “Equity Compensation Plan Information” and “Beneficial Ownership of Common Stock” in the Proxy Statement. Item 13. Certain Relationships, Related Transactions and Director Independence The information required by this item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” and “Corporate Governance — T Matters” in the Proxy Statement. Affirmative Determinations Regarding Director Independence and Other ff Item 14. Principal Accounting Fees and Services The information required by this item is incorporated by reference to the sections entitled “Independent Registered Public Accounting Firm Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Registered Public Accounting Firm” in the Proxy Statement. Starbucks Corporation 2017 Form 10-K 89 PART IV Item 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as a part of this 10-K: 1. Financial Statements The following financial statements are included in Part II, Item 8 of this 10-K: • • • • • • • Consolidated Statements of Earnings for the fiscal years ended October 1, 2017, October 2, 2016, and September 27, 2015; Consolidated Statements of Comprehensive Income for the fiscal years ended October 1, 2017, October 2, 2016, and September 27, 2015; Consolidated Balance Sheets as of October 1, 2017 and October 2, 2016; Consolidated Statements of Cash Flows for the fiscal years ended October 1, 2017, October 2, 2016, and September 27, 2015; Consolidated Statements of Equity for the fiscal years ended October 1, 2017, October 2, 2016, and September 27, 2015; Notes to Consolidated Financial Statements; and Reports of Independent Registered Public Accounting Firm 2. Financial Statement Schedules Financial statement schedules are omitted because they are not required or are not applicable, or the required information is provided in the consolidated financial statements or notes described in Item 15(a)(1) above. 90 Starbucks Corporation 2017 Form 10-K 3. Exhibits Exhibit Number 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 Exhibit Description Restated Articles of Incorporation of Starbucks Corporation Amended and Restated Bylaws of Starbucks Corporation (As amended and restated through September 13, 2016) Indenture, dated as of September 15, 2016, by and between Starbucks Corporation and U.S. Bank National Association, as trustee First Supplemental Indenture, dated March 17, 2017, by and between Starbucks Corporate and U.S. Bank National Association, as trustee, transfer agent and registrar, and Elavon Financial Services, DAC, UK Branch, as paying agent (0.372% Senior Notes due 2024) Form of 0.372% Senior Note due March 15, 2024 Indenture, dated as of August 23, 2007, by and between Starbucks Corporation and Deutsche Bank Trust Company Americas, as trustee Second Supplemental Indenture, dated as of September 6, 2013, by and between Starbucks Corporation and Deutsche Bank Trust Company Americas, as trustee (3.850% Senior Notes due October 1, 2023) Form of 3.850% Senior Notes due October 1, 2023 Third Supplemental Indenture, dated as of December 5, 2013, by and between Starbucks Corporation and Deutsche Bank Trust Company Americas, as trustee (0.875% Senior Notes due 2016 and 2.000% Senior Notes due 2018) ) Form of 2.000% Senior Notes due December 5, 2018 Fourth Supplemental Indenture, dated as of June 10, 2015, by and between Starbucks Corporation and Deutsche Bank Trust Company Americas, as trustee (2.700% Senior Notes due June 15, 2022 and 4.300% Senior Notes due June 15, 2045) Form of 2.700% Senior Notes due June 15, 2022 Form of 4.300% Senior Notes due June 15, 2045 Fifth Supplemental Indenture, dated as of February 4, 2016, by and between Starbucks Corporation and Deutsche Bank Trust Company Americas, as trustee (2.100% Senior Notes due February 4, 2021) Incorporated by Reference File No. 0-20322 Date of Filing 4/28/2015 Exhibit Number 3.1 Filed Herewith 0-20322 9/16/2016 3.1 Form 10-Q 8-K S-3ASR 333-213645 9/15/2016 4.1 8-K 0-20322 3/20/2017 4.2 8-K 0-20322 3/20/2017 S-3ASR 333-190955 9/3/2013 4.3 4.1 8-K 0-20322 9/6/2013 4.2 8-K 8-K 8-K 8-K 8-K 8-K 8-K 0-20322 9/6/2013 0-20322 12/5/2013 0-20322 12/5/2013 0-20322 6/10/2015 0-20322 6/10/2015 0-20322 6/10/2015 0-20322 2/4/2016 4.3 4.2 4.4 4.2 4.3 4.4 4.2 Starbucks Corporation 2017 Form 10-K 91 Exhibit Number 4.13 Exhibit Description Form of 2.100% Senior Notes due February 4, 2021 Incorporated by Reference Form 8-K File No. 0-20322 Date of Filing 2/4/2016 Exhibit Number 4.3 Filed Herewith 4.14 4.15 Sixth Supplemental Indenture, dated as of May 16, 2016, by and between Starbucks Corporation and Deutsche Bank Trust Company Americas, as trustee (2.450% Senior Notes due June 15, 2026) Form of 2.450% Senior Notes due June 15, 2026 8-K 0-20322 5/16/2016 4.4 8-K 0-20322 5/16/2016 4.5 92 Starbucks Corporation 2017 Form 10-K Exhibit Number 10.1* 10.2* 10.3 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* p y Exhibit Description Starbucks Corporation Amended and Restated 1989 Stock Option Plan for Non-Employee Directors Starbucks Corporation Employee Stock Purchase Plan — 1995 as amended and restated on April 9, 2015 to reflect adjustments for the 2-for-1 forward stock split effective on such date p Amended and Restated Lease, dated as of January 1, 2001, between First and Utah Street Associates, L.P. and Starbucks Corporation Starbucks Corporation Executive Management Bonus Plan, as amended and restated November 10, 2015, effective September 28, 2015 Starbucks Corporation Management Deferred Compensation Plan, as amended and restated effective January 1, 2011 Starbucks Corporation UK Share Save Plan Starbucks Corporation Directors Deferred Compensation Plan, as amended and restated effective September 29, 2003 Starbucks Corporation Deferred Compensation Plan for Non-Employee Directors, effective October 3, 2011 Starbucks Corporation UK Share Incentive Plan, as amended and restated effective November 14, 2006 Starbucks Corporation 2005 Long- Term Equity Incentive Plan, as amended and restated effective March 20, 2013, and as restated on April 9, 2015 to reflect adjustments for the 2-for-1 forward stock split effective on such date 2005 Key Employee Sub-Plan to the Starbucks Corporation 2005 Long- Term Equity Incentive Plan, as amended and restated effective November 15, 2005 2005 Non-Employee Director Sub- Plan to the Starbucks Corporation 2005 Long-Term Equity Incentive Plan, as amended and restated effective March 22, 2016 Form of Stock Option Grant Agreement for Purchase of Stock under the Key Employee Sub-Plan to the 2005 Long-Term Equity Incentive Plan Form of Global Stock Option Grant Agreement for Purchase of Stock under the Key Employee Sub-Plan to the 2005 Long Term Equity Incentive Plan Incorporated by Reference Form 10-K File No. 0-20322 Date of Filing 12/23/2003 Exhibit Number 10.2 Filed Herewith 10-Q 0-20322 8/1/2017 10.1 10-K 0-20322 12/20/2001 10.5 10-K 0-20322 11/18/2016 10.4 10-Q 0-20322 2/4/2011 10.2 10-K 10-K 0-20322 12/23/2003 10.9 0-20322 12/23/2003 10.10 10-K 0-20322 11/18/2011 10.11 10-K 0-20322 12/14/2006 10.12 10-Q 0-20322 4/28/2015 10.4 10-Q 0-20322 2/10/2006 10.2 10-Q 0-20322 04/26/2016 10.1 10-Q 0-20322 5/2/2012 10.1 10-K 0-20322 11/18/2016 10.14 Starbucks Corporation 2017 Form 10-K 93 Incorporated by Reference Form 10-Q File No. 0-20322 Date of Filing 04/26/2016 Exhibit Number 10.2 Filed Herewith 10-Q 0-20322 04/26/2016 10.3 8-K 0-20322 10/30/2017 10.1 8-K 0-20322 10/30/2017 10.2 8-K 0-20322 7/29/2016 10.1 10-Q 0-20322 5/8/2008 10.3 10-K 0-20322 11/18/2011 10.30 10-K 0-20322 11/18/2016 10.21 10-K 0-20322 11/18/2016 10.22 X X X 10-Q 0-20322 4/29/2014 10.3 Exhibit Number 10.15* 10.16* 10.17 10.18 10.19 10.20* 10.21* 10.22* 10.23* 10.24* 10.25* 10.26* 10.27* Exhibit Description Form of Stock Option Grant Agreement for Purchase of Stock under the 2005 Non-Employee Director Sub-Plan to the Starbucks Corporation 2005 Long-Term Equity Incentive Plan Form of Restricted Stock Unit Grant Agreement under the 2005 Non- Employee Director Sub-Plan to the Starbucks Corporation 2005 Long- Term Equity Incentive Plan Credit Agreement, dated October 25, 2017, among Starbucks Corporation, Bank of America, N.A., in its capacity as Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank, N.A., Citibank, N.A. and U.S. Bank National Association, as L/C Issuers, and the other Lenders from time to time a party thereto. 364-Day Credit Agreement, dated October 25, 2017, among Starbucks Corporation, Bank of America, N.A., in its capacity as Administrative Agent and Swing Line Lender, and the other Lenders from time to time a party thereto. Form of Commercial Paper Dealer Agreement between Starbucks Corporation, as Issuer, and the Dealer Letter Agreement dated February 21, 2008 between Starbucks Corporation and Clifford Burrows Form of Time Vested Restricted Stock Unit Grant Agreement (U.S.) under the Key Employee Sub-Plan to the 2005 Long-Term Equity Incentive Plan Form of Time Vested Global Restricted Stock Unit Grant Agreement under the Key Employee Sub-Plan to the 2005 Long-Term Equity Incentive Plan Form of Performance Based Global Restricted Stock Unit Grant Agreement under the Key Employee Sub-Plan to the 2005 Long-Term Equity Incentive Plan Form of Global Key Employee Restricted Stock Unit Grant Agreement Form of Global Key Employee Stock Option Grant Agreement for Purchase of Stock under the 2005 Long-Term Equity Incentive Plan Form of Global Key Employee Restricted Stock Unit Grant Agreement (Performance-Based) Exclusive Aircraft Sublease (S/N 6003) dated as of September 27, 2013 by and between Cloverdale Services, LLC and Starbucks Corporation 94 Starbucks Corporation 2017 Form 10-K Exhibit Number 10.28* 10.29* 10.30* 10.31* 10.32* Exhibit Description Letter Agreement dated November 30, 2009 between Starbucks Corporation and John Culver Letter Agreement dated May 16, 2012 between Starbucks Corporation and Lucy Lee Helm Letter Agreement dated January 29, 2014 between Starbucks Corporation and Scott Maw Offer Letter dated March 23, 2017 between Starbucks Corporation and Kevin Johnson Offer Letter dated August 23, 2017 between Starbucks Corporation and Rosalind Brewer Incorporated by Reference Form 10-Q File No. 0-20322 Date of Filing 2/2/2010 Exhibit Number 10.3 Filed Herewith 10-K 0-20322 11/14/2014 10.33 8-K 0-20322 1/29/2014 10.2 10-Q 0-20322 5/2/2017 10.1 8-K 0-20322 9/6/2017 10.1 Starbucks Corporation 2017 Form 10-K 95 Incorporated by Reference Form — File No. — Date of Filing — Exhibit Number — Filed Herewith X — — __ — — — — — — __ — — — — — — __ — — — — — — __ — — — — X X X X X X Exhibit Number 12 21 23 24 31.1 31.2 32** 101 Exhibit Description Computation of Ratio of Earnings to Fixed Charges Subsidiaries of Starbucks Corporation Consent of Independent Registered Public Accounting Firm Power of Attorney (included on the Signatures page of this Annual Report on Form 10-K) Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The following financial statements from the Company’s 10-K for the fiscal year ended October 1, 2017, formatted in XBRL: (i) Consolidated Statements of Earnings, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Equity, and (vi) Notes to Consolidated Financial Statements y * Denotes a management contract or compensatory plan or arrangement. **Furnished herewith. 96 Starbucks Corporation 2017 Form 10-K Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AA SIGNATURES STARBUCKS CORPORATION By: /s/ Kevin R. Johnson Kevin R. Johnson president and chief executive officer ff November 17, 2017 POWER OF ATTAA ORNEY ww Know all persons by these presents, that each person whose signature appears below constitutes and appoints Kevin R. Johnson s true and lawful attorneys-in-fact and agents, with full power of substitution and Scott Maw, and each of them, as such person’ and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents, or any of them or their or such person’s substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of November 17, 2017. Signature g Title By: /s/ Kevin R. Johnson Kevin R. Johnson By: /s/ Scott Maw Scott Maw By: /s/ Howard Schultz Howard Schultz By: /s/ William W. Bradley William W. Bradley By: /s/ Rosalind G. Brewer Rosalind G. Brewer By: /s/ Mary N. Dillon Mary N. Dillon By: /s/ Robert M. Gates Robert M. Gates president and chief executive officer (principal executive officer) ff ff , director executive vice president, chief financial officer (principal financial officer and principal accounting ff officer) ff ff executive chairman director director director director Starbucks Corporation 2017 Form 10-K 97 Signature g By: /s/ Mellody Hobson Mellody Hobson By: /s/ Jørgen Vig Knudstorp Jørgen Vig Knudstorp VV By: /s/ Satya Nadella Satya Nadella By: /s/ Joshua Cooper Ramo Joshua Cooper Ramo By: /s/ Clara Shih Clara Shih By: /s/ Javier G. Teruel Javier G. Teruel By: /s/ Myron E. Ullman, III Myron E. Ullman, III By: /s/ Craig E. Weatherup Craig E. Weatherup Title director director director director director director director director 98 Starbucks Corporation 2017 Form 10-K ®
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