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Fundamental View
AS OF 23 May 2024SBUX operates and licenses Starbucks care locations. Management targets 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.
Management slashed its F2024 outlook. We still see a path for SBUX to maintain stable leverage metrics over the medium-term, but prefer playing the restaurant space via McDonald’s where we see stronger buffers against weaker restaurant traffic.
Business Description
AS OF 23 May 2024- SBUX is a leading coffee roaster and retailer. The company operates and licenses over 38,000 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 $36.0 bn in revenue and $7.3 bn in adjusted EBITDA. SBUX has three reporting segments: N. America (74% of F2023 revenue), which covers cafes in the U.S. and Canada; International (21%), which includes China, Japan, Latin America, and EMEA; and Channel Development (5.9%) which includes revenue from other branded products sold outside retail locations.
- SBUX is prioritizing International development, particularly within China. Currently, 43% of the total cafes are in the U.S., but the company is guiding to an ambitious unit expansion strategy that emphasizes unit growth across China. Long-term, SBUX is targeting 55,000 cafes globally by 2030.
Risk & Catalysts
AS OF 23 May 2024SBUX has more direct exposure to labor challenges than wholly franchised peers due to its concentration of company operated cafes. Despite significant wage investments, SBUX has had to contend with an unionization campaign across a portion of its U.S. cafes. However, union growth has slowed and management noted improved employee retention following the latest wage increases.
Lower discretionary spending in the U.S. could weigh on SBUX’s sales growth. Recent results showed lower traffic on a YoY basis due primarily to fewer visits from occassional or non-rewards memebers. SBUX U.S. business has also faced localized boycotts related to its labor disputes and its conduct of business in the Middle East.
SBUX’s China locations accounted for 10+% of operating income pre-pandemic and management considered it the strongest growth region. However, increased competition and weak spending data have impacted cafes across the region in recent periods.
Key Metrics
AS OF 23 May 2024$ mn | Y20 | Y21 | Y22 | Y23 | LTM 2Q24 |
---|---|---|---|---|---|
Revenue | 23,518 | 29,061 | 32,250 | 35,976 | 36,530 |
EBITDA | 3,636 | 6,775 | 6,385 | 7,252 | 7,406 |
EBITDA Margin | 15.5% | 23.3% | 19.8% | 20.2% | 20.3% |
EBITDA-Capex to Revenue | 9.1% | 18.3% | 14.1% | 13.7% | 13.2% |
Total Debt | 16,348 | 14,616 | 15,044 | 15,400 | 15,590 |
Net Debt | 11,997 | 8,160 | 12,226 | 11,848 | 12,826 |
Net Leverage | 3.3x | 1.2x | 1.9x | 1.6x | 1.7x |
Lease Adjusted Debt to EBITDAR | 5.0x | 2.9x | 3.1x | 2.8x | 2.8x |
EV / EBITDA | 31.0x | 20.4x | 17.1x | 16.1x | 15.7x |
CreditSights View
AS OF 21 May 2024We are downgrading our recommendation on Starbucks from Market perform to Underperform following a weak F2Q24 result with a massive reset in F2024 guidance. While we had anticipated a slowdown in comparable sales growth amid a tougher consumer environment, the F2Q results were worse than anticipated and we think it is prudent to taper exposure until the company shows signs of stabilization in traffic trends. We maintain a preference for McDonald’s, SBUX’s high-BBB rated peer in the quick service restaurant space. While MCD is also navigating an environment with lower foodservice traffic, we like its menu of value-oriented food and beverage offerings relative to SBUX. We also expect overhang at SBUX from its sizable China exposure, and note increased levels of competition in the market.
Recommendation Reviewed: May 21, 2024
Recommendation Changed: May 01, 2024
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