Q2 Earnings and the Continuing Path Forward

Today, we reported financial results for our fiscal second quarter and provided financial targets for the three-year period of fiscal year 2009 through 2011. I wanted to take this opportunity to personally share some of the exciting news with you.

Even though we are experiencing some difficulties as a result of the tough operating environment in the U.S. and other factors, I am very proud of our accomplishments thus far and I am sure that we are on the right track to transform our customers’ experience. In just a few months, we have done some pretty impressive things, including the successful launch of Pike Place Roast™, which is our No. 1 whole bean coffee. Congratulations! Please keep sampling and sharing this great coffee with your brewed coffee customers. To say that we have been busy is an understatement! I want you to know that I am aware of how hard everyone is working to strategically and swiftly move Starbucks forward, and as always, I thank you for stepping up to the challenge.

As part of the next phase of our Transformation Agenda, we will focus on our core beverage business, specifically our cold and blended categories, which will invigorate our cold beverage offerings. This summer we will introduce three innovative beverage platforms that, we believe, consumers won’t be able to find at other establishments and will differentiate us in the category. The names of these delicious new beverages and specific introduction dates will be announced as we get closer to the implementation rollout.

Three Innovative Beverage Platforms

• The first new beverage platform represents Starbucks entry into the energy beverage category, which is a multi-billion dollar market segment. Our entry offers a significant opportunity for us to complement our current customers’ lifestyles and reach out to new customers. Other entrants into this space use caffeine as a supplement in their energy beverages, which makes Starbucks a natural—and gives us a unique position in the marketplace with Starbucks coffee as well as build equity in our brand.

With this introduction – and for the first time in the company’s history – we are leveraging the assets of our relationship with Pepsi to introduce Starbucks DoubleShot® with energy across multiple channels – in our retail stores and through the more traditional Consumer Products Group (CPG) channels.

• Living a healthy lifestyle is a personal focus of mine, and I am pleased that Starbucks is launching a Health and Wellness platform that will include some great product offerings. We also see this as an important long-term growth driver for the company. This summer, we will make our first significant step forward into this category when we introduce a Health and Wellness beverage platform, with new food offerings joining the platform later in the calendar year.

Our customers have told us that they are looking for healthy beverage alternatives that taste great, with moderate calories. We listened to them and we believe we have hit the mark with a protein and fruit-blended beverage that we have developed. This delicious drink is a made from simple and wholesome ingredients that provide the benefit of sustained energy.

We have been testing these beverages in our stores, and they have received rave reviews from our customers and partners, even exceeding our early expectations. We have a deep pipeline of many new products that we plan to introduce through the rest of the year. We are confident that Starbucks can be a destination for great healthy beverages and food.

• For some time, we have been searching all over the world for a cold beverage concept that would create the type of taste and customer excitement that our Frappuccino^® Blended Beverage did more than 10 years ago. Finally, on a recent trip to Italy, we found a unique product that we believe will be a perfect complement to our overall beverage business. This exclusive, proprietary product—which is refreshing and indulgent all at the same time—was developed through a partnership with our Italian supplier and represents a new category of beverage. With its unique frozen, smooth texture and distinctive taste profiles, ranging from fruit-based to dairy-based to yogurt-based ingredients, we are sure that these innovative offerings will attract new customers.

We are rapidly developing the product line-up, and have plans to initially launch these new beverages by mid-summer in parts of California, where there is a strong preference for robust cold beverages. I haven’t tasted anything this good in a long time. We are confident that our unique new beverage category will be received with great enthusiasm by our customers in California, and set the stage for our national launch in fiscal year ’09.

While beverages are our core competency and our primary focus, we also remain committed to enhancing our complementary food offerings – which, includes successfully replacing our warmed breakfast sandwiches with healthy, unique breakfast alternatives. We have made great progress in this area…and with other products in our food assortment – which all have a special tie-in to our beverage Health and Wellness focus. Our Food transformation begins with the launch of new, nutritious breakfast foods in September, and continues with the replacement of our current breakfast sandwiches in the first quarter of fiscal year ‘09. We will follow this with the roll-out of a new bakery and chilled foods program.

As I have stated many times since I returned as ceo, 2008 is a year of transition for Starbucks. It is a year for us to re-energize and sharpen our focus on the brand and our business. We are invigorated and we’re coming back strong in delivering innovation and creativity. Although our investment in our bold initiatives may adversely impact our results in the near term, we must aggressively pursue initiatives that position us to capture long-term opportunities. So stay tuned…This is just the beginning!

Onward,

Howard

Commitment to our Core and our Customer’s Experience

Yesterday, we pre-announced our preliminary second quarter results and our revised earnings per share target for fiscal 2008 to the financial community, which reiterated the negative effect that the economy is having on our business. Like many other retailers and consumer brands, especially at the premium end, we are experiencing a down turn in customer traffic. We have conducted research that validates that our customers are not going to other places for their coffee experience, instead they are visiting us less frequently as the result of economic pressures. However, I remain concerned about the macroeconomics of our current business environment and the duration of this challenging period in the U.S. economy.

Although these are difficult days, I promise you that we will manage through them in a way that will provide long-term value for you and our shareholders. This is the time when we must do everything within our power to enhance the customer experience through constant innovation and stellar customer service as well as partner engagement. With the recent success of the Espresso Excellence Training and launch of Pike Place Roast, we have created great excitement with our partners and renewed customer interest in our brewed coffee platform, which I believe, is an early positive sign of the potential success of our transformation.

As I have previously said, we will continue to focus on our core and be more innovative in the next 12 to 18 months than we have been in the last five years. This is a big statement that comes with a tremendous amount of responsibility, but the leadership team is up to the challenge. We are laser focused on every aspect of our business including managing our expenses and making the proper investments to move the business forward.

When we introduced the Starbucks Transformation Agenda in January, we promised to take a critical look at all parts of our business, without exception. Although it is painful, we are revisiting and refining certain business strategies that are not directly related to our core. Therefore, we have decided this is the appropriate time to restructure the Entertainment business. Our new Entertainment business strategy will focus on our Digital Strategy and Core Content. Digital Strategy includes Starbucks existing strategic relationships with Apple and AT&T, as well as the in-store “Now Playing” LCD screens and potential expansion into new spaces. The Core Content area includes Starbucks current relationship with the William Morris Agency that enables the agency to identify book projects that we can offer in our stores as well as provide strategic counsel on opportunities in the entertainment space. We will partner with the Concord Music Group to manage the Hear Music Record Label and leverage our superb curatorial voice to offer compelling entertainment options, including our music compilations as well as existing and new recording artists.

Ken Lombard, senior vice president and president of Starbucks Entertainment, has left the company. Under Ken’s leadership, Starbucks enjoyed success across many entertainment platforms, and I am personally grateful for Ken’s numerous contributions to the company. Chris Bruzzo, chief technology officer, has been promoted to senior vice president and will assume the leadership helm of Entertainment as part of his responsibilities, which you will learn more about in an upcoming organization announcement. The new Entertainment business will be more focused on our core, and will have fewer SKUs. Additionally, the team will be significantly smaller. The new organization is currently being finalized and partners within the Entertainment business will learn more about the structure within the next two weeks. Rest assured that we will make every effort to assist displaced partners by either redeploying them to another role within Starbucks or assisting them with their job search outside of the company. I would like to personally thank each of them for their contributions to our business and acknowledge their numerous successes in this area including: three No. 1 books on the New York Times Bestseller’s List, eight Grammy® Awards for Ray Charles’ Genius Loves Company CD, and the introduction of emerging artists like Hilary McRae and Sia.

In closing, I would like to reiterate that we are still in the early stages of our transformation and efforts to enhance our customers’ experience. There is still much work to be done, but we will succeed. Our summer, fall, and holiday promotional periods are coming up, which, I believe, will be enthusiastically embraced by our customers and partners.

We are off to a good start and I thank you for your commitment and tireless efforts to transform Starbucks for the future.

Onward,

Howard

Together Let’s Make This A Better Earth

I encourage you to join us in a great cause by using your Starbucks card–we’ll donate 5-cents for each purchase–or donating directly to our partner, Conversation International starting today, on Earth Day 2008. Together, let’s make this a better place for each other and our families. Here’s the press release:

In celebration of Earth Day—and to help ensure that the principles of Earth Day last all year long—Starbucks and Conservation International (CI) today announced the beginning of a new campaign to engage consumers to join their efforts to address climate change and create a better future for coffee farmers. This effort kicks off with two in-store opportunities for consumers to give back to the environment, including the use of their Starbucks Card and the purchase of Pike Place Roast, Starbucks new responsibly grown, ethically traded coffee.

On April 22, Earth Day, Starbucks will donate five cents to CI for every purchase made that day with a Starbucks Card at any Starbucks store in the U.S. and Canada. This is a one-time benefit afforded by the new Starbucks Card Rewards program. Every $10 donated will result in CI planting 10 trees in Chiapas, Mexico as part of an upcoming joint pilot project between the two organizations.

“Since 1998, Starbucks and CI have collaborated to demonstrate that coffee can be grown in ways that support communities and preserve the environment,” said Ben Packard, Starbucks vice president of Corporate Social Responsibility. “Through this next phase of our relationship, we hope to extend our leadership in coffee sustainability and to invite our customers to join us in promoting the protection of forests as a solution to climate change.”

CI and Starbucks recently announced a five-year global commitment to support farming communities, encourage the protection of their land, water and forests, including a three year multi-million dollar financial commitment. By taking conservation beyond coffee farms and into surrounding landscapes, CI and Starbucks are addressing the most pressing environmental issue of our day—climate change. Beginning in Mexico and Indonesia, Starbucks and CI will pilot projects that create climate solutions through the protection of standing forests and restoration of degraded landscapes.

“The issue of climate change is everyone’s issue, and by engaging Starbucks customers in one of the solutions to climate change is very encouraging,” said Glenn Prickett, Senior Vice President and Executive Director, Center for Environmental Leadership in Business, Conservation International. “Buying a cup of coffee may seem like too small an action to make a difference, but simple changes can be multiplied to reach a scale never before realized—and we are saving thousands of acres of tropical forests in the process.”

Almost 20 percent of all carbon dioxide emissions result from the burning and clearing of forests, nearly double the emissions from all of the world’s cars, trucks, and trains combined. Starbucks investment in and support for local coffee growers and the communities that help keep forests intact will help ensure that every cup of coffee brewed produces tangible benefits for both local and global communities.

Earth Day is also when the new mark will be launched that symbolizes Starbucks ongoing commitment to coffee communities and to environmental sustainability through the expanded relationship with CI. This mark will first appear on Pike Place Roast™. Coffee bearing the new mark is purchased from C.A.F.E. Practices approved suppliers. These suppliers have undergone rigorous third-party inspections in the field. C.A.F.E. Practices—Starbucks sustainable coffee buying program—is designed to build long-term relationships with suppliers of high quality coffee who demonstrate excellent performance on sustainability criteria addressing issues such as healthy workplace conditions and conservation of natural ecosystems.

In addition, consumers can support the purchase of trees for Chiapas coffee farmers by contributing through the CI website at www.conservation.org/coffee.

Building Something to Admire

Each year Interbrand conducts a brand valuation and love study and each year Starbucks ranks among the most beloved. As proud as that makes us, what’s telling are the categories in which we rate highest and the company we keep.

• Which brands inspire you most: Apple, Nike Coca-Cola, Google and Starbucks
• What brand can you not live without? Apple, None (tough category), Coca-Cola, Google and Starbucks

What these brands have in common are an outstanding experience, innovation, passion and a team of people behind the brands that show up every day to make the brand worth admiring.

Onward

Pick of The Week, Starbucks+iTunes

Wanted to pass this along to you as a tax-day bright spot: Starbucks & iTunes Bring Complimentary Digital Music and Video Offerings to Customers with Starbucks “Pick of the Week” More Than 1.5 Million Downloads Every Week Driving Discovery of New Music and Music Videos
Starbucks (NASDAQ:SBUX) and iTunes today announced Pick of the Week, a new program offering coffeehouse customers a chance to discover complimentary new music and music videos each week. Pick of the Week featured artists include a great line-up with Carly Simon, Duffy, Counting Crows, Adele, Sia, Hilary McRae and many more.

Each Tuesday, more than 7,000 Starbucks company-operated locations in the US will stock a new Pick of the Week download card redeemable on the iTunes Store (www.itunes.com) for a complimentary song or music video hand-picked by the Starbucks Entertainment team and iTunes. The first Pick of the Week, available starting today at participating Starbucks locations, is Counting Crows’ new song, “Washington Square.”

“With Pick of the Week, Starbucks will leverage its trusted curatorial voice in music and entertainment through its partnership with iTunes to provide our customers with a world-class digital discovery experience,” said Ken Lombard, president Starbucks Entertainment.

“Pick of the Week provides an incredible way for Starbucks customers to discover great new music and videos for free on the iTunes Store,” said Eddy Cue, Apple’s vice president of iTunes. “With the world’s largest online catalog of music and video there is truly something for everyone.”

In October 2007, Starbucks and iTunes teamed up to launch Song of the Day, which offered Starbucks customers the opportunity to pick up a new complimentary download hand-picked by Starbucks Entertainment and iTunes each day for a month. Customer response to Song of the Day was unprecedented and resulted in more than 6 million songs downloaded. Realizing that a large audience hungry to discover new music and entertainment content had been tapped, Starbucks and iTunes worked together to create an ongoing version of the program to drive discovery and sales for great artists.

Once Pick of the Week cards are distributed, customers will then have up to 60 days from the date they are available to redeem their complimentary digital entertainment offering on iTunes.

Pick of the Week is the next phase in a partnership between Starbucks and Apple which began with the launch of the Starbucks Entertainment Area within iTunes in October 2006 and the launch of the iTunes Wi-Fi Music Store at select Starbucks locations in October of 2007. The iTunes Wi-Fi Music Store at Starbucks lets customers at participating Starbucks use the Wi-Fi network to wirelessly download music onto their iPhone, iPod touch or computer with no Wi-Fi connection fees or hotspot login.

The iTunes Wi-Fi Music Store at Starbucks is currently available in select Starbucks locations in the New York, Seattle and San Francisco metropolitan areas on its way to a national service rollout. Starbucks also offers the exclusive Now Playing feature on the iTunes Wi-Fi Music Store, which allows customers to instantly preview, buy and download the music currently playing overhead in participating Starbucks locations.

Onward

Splash Stick Is A Metaphor

Filed under Transformation Agenda #13: Thank you for the truly remarkable achievements last week! It reminds me of our early days … great coffee (the likes of which you can only get at Starbucks), proud partners engaged and having fun, and customers embracing the Starbucks Experience. Pike Place Roast™ and the reinvention of brewed coffee are off to a fantastic start. The coffee performed as we knew it would and our partners in over 7,000 U.S. company-operated stores brought it all to life.

This is just the beginning of enhancing the customer experience through coffee, demonstrating our relentless commitment to innovation, and increasing partner engagement. Let’s keep the momentum going and show the world our best days are ahead — one partner, one customer, one cup at a time.

Our efforts to enhance the Starbucks Experience — no matter how big or small — are making an impact. Let me give an example:

Friday morning, I walked into one of our stores and watched as a customer inserted a “splash stick” into the lid of his coffee cup. He recognized me and went out of his way to acknowledge this little item that has made Starbucks® coffee more enjoyable. As he left the store, he thanked me and said, “Only Starbucks would think of something like this!”

The experience stayed with me and I now recognize that the “splash stick,” is a metaphor for what we do every day to exceed the expectations of our customers. I don’t know another company that would go to such lengths to design the perfect tool to elegantly prevent a customer from spilling coffee … and that is exactly what we have done. The “splash stick,” although small in size, and brewed reinvention, although large in scale, are threaded together to enable customers, and all of you, to have an exceptional experience that only we can provide.

For years now, I have said that everything we do matters, our success is not an entitlement and we have to earn it. Last week, we earned our success and presented to the marketplace what we do best –- creating a blend of coffee that is best of class, and providing our customers with legendary service that brings the Starbucks Experience to life.

During countless interviews this past week, members of the media asked about the coffee wars and competition. As you know, I have always been mindful and respectful of all competitors small and large, but I have also been resolute in my position that this is not about anyone else but us. The economy, and its affect on consumer confidence, is a major challenge and will probably become more fragile before getting better. Competitors will continue their attempts to interfere with the relationship we have with our customers. However, my faith and confidence in our company has never been greater than it is today. Pike Place Roast™ is the first of many initiatives that we have planned to enhance the customer experience. The response (despite the strong economic headwind) from our customers is quite encouraging.

We will continue to innovate in a variety of unique ways. (Wait until you see what we have planned for summer, and for our leadership conference when we unveil our coffee and merchandise plan for Fall and Holiday). You will be blown away …

We have taken a great step forward (the first of many). The road ahead, I promise, will be filled with the pride and excitement we are all feeling with the launch of Pike Place Roast™. Get ready for lots more. We are just getting started.

Thank you for all that you do.

Onward,

Howard

Customer Training Night?

Over at Starbucks Gossip –an outstanding site (although I take exception with their tagline) that may be more about the community of customers, partners, fans and haters/cynics than we could have created ourselves–this comment was brought to my attention:

“Maybe [Starbucks] should have a “customer training night”. Customers can attend and be taught how to properly order a drink useing the correct slangs, symbols and phonetics.”

That sounds like a great idea. What do you think? Once a year, quarter or month? With 87,000 different possible combinations of drinks, we’ve got a lot to cover. Let’s get started…

Announcing Pike Place Roast

Next week we will experience one of the most significant moments in the history of our company. After much anticipation, we will introduce our new coffee, Pike Place Roast, which we will serve everyday in our U.S. company-operated stores. In my opinion and that of several others who have tasted this incredible coffee, Pike Place Roast is truly one of the best coffees we have offered our customers in our 37-year history and it will reinvent brewed coffee. It is so good that when we discussed names, it felt only right that it should be named after our home in Pike Place Market. We would never have considered naming the coffee after Pike Place unless it achieved all of our expectations in the cup…and it did that and more. And the original logo acknowledges our pride in our past and embraces our heritage as the world’s leading purveyor of specialty coffee.

As you know through various internal conversations about Pike Place Roast, it is a unique blend of the highest quality, sustainably grown beans. It is our first coffee to carry the new mark that symbolizes Starbucks renewed commitment, with Conservational International (CI), to support farmers, workers and their communities and help ensure that our coffee is responsibly grown and ethically traded. Pike Place Roast features Starbucks signature bold flavor with a smoother finish and showcases our 37 years of coffee roasting experience, knowledge and passion. Starbucks master coffee blenders and roasters have “done us proud.” And I would like to thank the following coffee and roasting technology partners for their dedication to creating a superb blend, with a flavor profile that reflects input from customers and baristas: Andrew Linnemann, Anthony Carroll, Geory Kurtzhals, Leslie Wolford, Dave Wickberg, Brad Anderson and Brian Hayes. In addition, I would like to recognize Katie Simons, Mindy Sagez and the other members of the Beverage team, who also helped to launch Pike Place Roast.

That said, please know that words can’t really express just how pleased we are with this wonderful coffee. The proof of its excellence is not in my words, marketing or hype … the proof is in the cup. It truly represents the best of who we are! I ask that you do everything you can to sample and put a cup of Pike Place Roast in the hands of every customer you encounter next week. I encourage all U.S. partners in company-operated stores to have a conversation about this exceptional coffee as well as our new quality standards for freshness, hand-scooping, and smaller brewed coffee batches with no more than 30-minute hold times. Pike Place Roast takes us one step closer to achieving our goal of transforming the in-store experience by restoring the connection our customers have with our coffee.

Pike Place Roast also gives us another opportunity to celebrate our history and heritage that takes us “back to the future.” We are so very proud of what we have achieved, so let’s talk about it! And we will be doing just that across the U.S. next week, with major coast-to-coast celebrations beginning in New York City and ending in Seattle. This is such an exciting and important time for the company, and I can’t say enough about how proud I am of what we have accomplished with the introduction of this outstanding coffee.

Although Pike Place Roast will not be available in our international markets at this time, they will migrate to 30-minute hold times for brewed coffee in the coming months, while a longer-term brewed program is being determined. U.S. licensed stores and Canadian locations will freshly brew House Blend every 30 minutes and will be introducing Pike Place Roast within the year. However, I am happy to tell you that our international, licensed store and Canadian partners are anxious to join our brewed coffee reinvention and share our enthusiasm for Pike Place Roast. They also recognize that it exemplifies everything that we are experts in: buying, blending and roasting the highest quality arabica beans in the world, as well as providing an excellent experience for all of our customers.

So I will close now by extending my gratitude to you, once again, for all that you do on behalf of Starbucks and invite you to raise a cup of Pike Place Roast in a coffee toast to the future success of our great company.

Onward,

Howard