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Fundamental View
AS OF 10 Dec 2024SBUX operates and licenses Starbucks care locations. Management has historically targeted lease-adjusted leverage of under 3x and has expressed support for the current high-BBB ratings profile.
Recent results showed headwinds from lower traffic across the company’s locations in the U.S. amid weaker consumer spending. SBUX also reported weak results in its second-largest market, China, due to increased competition in the market.
SBUX navigated a volatile 2024, which included activist investments and an abrupt CEO change. While new CEO Brian Niccol is an experienced operator, we have reservations about the company’s restaurant reimaging plans.
Business Description
AS OF 10 Dec 2024- SBUX is a leading coffee roaster and retailer. The company operates and licenses over 40,000 Starbucks locations worldwide where it sells premium coffee beverages as well as other specialty drinks and prepared foods. Slightly over half the locations are company operated (52%) and the rest are licensed to third party operators.
- In F2023, SBUX generated $36.2 bn in revenue and $7.0 bn in adjusted EBITDA. SBUX has three reporting segments: N. America (75% of F2023 revenue), which covers cafes in the U.S. and Canada; International (20%), which includes China, Japan, Latin America, and EMEA; and Channel Development (4.9%) which includes revenue from other branded products sold outside retail locations.
- SBUX is prioritizing International development, particularly within China. Currently, 42% of the total cafes are in the U.S., but the company is guiding to an ambitious unit expansion strategy that emphasizes unit growth across China. Long-term, SBUX is targeting 55,000 cafes globally by 2030.
Risk & Catalysts
AS OF 10 Dec 2024In response to the activist attacks, SBUX announced an unexpected change in CEO and hired Brian Niccol, a veteran of the quick service restaurant industry with a successful track record at Taco Bell and Chipotle.
Lower discretionary spending in the U.S. could continue to weigh on SBUX’s sales outlook. We view its premium-priced beverage offerings as having significant risk of consumer trade down into more value-oriented options.
SBUX faces activist pressure from both Elliott and Starboard Value. There have been reports that the company is considering strategic partnerships or alternatives for its locations in China, where SBUX has consistently reported weak results (China locations represent ~10% of total company operating income).
Key Metric
AS OF 10 Dec 2024| $ mn | Y20 | Y21 | Y22 | Y23 | LTM 4Q24 |
|---|---|---|---|---|---|
| Revenue | 23,518 | 29,061 | 32,250 | 35,976 | 36,176 |
| EBITDA | 3,636 | 6,775 | 6,385 | 7,252 | 7,001 |
| EBITDA Margin | 15.5% | 23.3% | 19.8% | 20.2% | 19.4% |
| EBITDA-Capex to Revenue | 9.1% | 18.3% | 14.1% | 13.7% | 11.7% |
| Total Debt | 16,348 | 14,616 | 15,044 | 15,400 | 15,568 |
| Net Debt | 11,997 | 8,160 | 12,226 | 11,848 | 12,282 |
| Net Leverage | 3.3x | 1.2x | 1.9x | 1.6x | 1.8x |
| Lease Adjusted Debt to EBITDAR | 5.0x | 2.9x | 3.1x | 2.8x | 2.9x |
| EV / EBITDA | 31.0x | 20.4x | 17.1x | 16.1x | 17.6x |
CreditSight View Comment
AS OF 31 Oct 2024We maintain an Underperform view on SBUX. Recent results showed slower traffic across the portfolio of cafes amid tighter consumer spending patterns in the U.S. and an increasingly competitive coffee shop market in China. We think both headwinds could continue over the medium-term. While we do see a path for the company to keep leverage near management’s communicated sub-3x lease-adjusted target even with subdued results, we are wary of a potential shift to more shareholder-friendly capital allocation amid the current environment. To that end, SBUX confirmed that activist Elliott Management has taken a stake. We see stronger relative value at high-BBB rated McDonald’s where we like the more franchised operating model and value-oriented menu options.
Recommendation Reviewed: October 31, 2024
Recommendation Changed: May 01, 2024
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