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Sector: Consumer
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Fundamental View
AS OF 27 Aug 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.
Elliott Management has taken a stake at SBUX. Specific plans have not been reported, but we see potential for Elliott to lobby for a more shareholder friendly capital allocation approach. We remain cautious around SBUX credit.
Business Description
AS OF 27 Aug 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 27 Aug 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. While specific plans have not been reported, we see potential for activists to call for more assertive shareholder rewards or to push for new approaches to the locations in China, where SBUX has consistently reported weak results (China locations represent ~10% of total company operating income).
Key Metric
AS OF 27 Aug 2024| $ mn | Y20 | Y21 | Y22 | Y23 | LTM 3Q24 |
|---|---|---|---|---|---|
| Revenue | 23,518 | 29,061 | 32,250 | 35,976 | 36,476 |
| EBITDA | 3,636 | 6,775 | 6,385 | 7,252 | 7,376 |
| EBITDA Margin | 15.5% | 23.3% | 19.8% | 20.2% | 20.2% |
| EBITDA-Capex to Revenue | 9.1% | 18.3% | 14.1% | 13.7% | 12.9% |
| Total Debt | 16,348 | 14,616 | 15,044 | 15,400 | 15,575 |
| Net Debt | 11,997 | 8,160 | 12,226 | 11,848 | 12,395 |
| 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 | 13.6x |
CreditSight View Comment
AS OF 19 Sep 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: September 19, 2024
Recommendation Changed: May 01, 2024
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Search topics about wealth insights and investments.Amazon.com
- Sector: ConsumerTechnology Media and Telecommunications
- Sub Sector: Retail/GrocersTechnology
- Region: US
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Fundamental View
AS OF 11 Aug 2023- We continue to have confidence in CEO Andy Jassy and the company’s long-term business for both AWS and consumer. The 2Q23 results support our view as AWS growth is stabilizing and the North America consumer segment significantly improved its GAAP operating profit. AWS customers are shifting from workload optimizations to new workload deployments, and we expect AWS to remain a profitable growth driver for the foreseeable future.
- We anticipate the North America segment to see continued profitability improvements driven by operating leverage, cost reductions, and productivity gains including the regionalization of its fulfillment network. Gross leverage declined by nearly 2 ticks to 0.8x or 1.6x on a lease-adjusted basis. Also, Amazon’s equity cushion is ~$1.4 tn.
Business Description
AS OF 11 Aug 2023- Amazon is an e-commerce company which sells a wide range of its own products and those of 3rd party sellers. Amazon offers fulfillment services for 3rd party sellers (FBA) and sells cloud computing services (AWS). In 2Q23, 3rd party units were 60% of total paid units, and FBA units are a majority of 3rd party units.
- In LTM 2Q23, NA segment was 62% of sales, International was 22% of sales, and AWS was 16% of sales.
- Amazon disclosed it surpassed 200 mn Prime members in April 2021. The annual membership was increased in February 2022 from $119 to $139 in the US, although fees vary by country. In mid-2019, Amazon Prime began to transition from 2-day to 1-day shipping. Amazon Prime also offers Prime Video, streaming music, and other benefits.
- In 2006, Amazon launched AWS which remains the leader in cloud computing (IaaS/PaaS). Amazon sells its own devices (e-reader, smart speaker, streaming media player, etc.).
Risk & Catalysts
AS OF 11 Aug 2023- We think Amazon has moderate event risk as its large size (~$1.4 tn market cap) provides a buffer against the regulatory risks.
- Amazon has taken steps to improve profitability including multiple rounds of layoffs which could preempt activist investor campaigns that have become more common lately for Big Tech including GOOGL and META.
- Amazon continues to face regulatory scrutiny. The FTC is finalizing a lawsuit alleging AMZN disadvantages third-party merchants who do not use its services. The biggest risk would be a breakup, although we view that as unlikely.
- Amazon’s $14 bn acquisition of Whole Foods has shown its proclivity for large M&A, although the regulatory environment could make large deals challenging e.g., FTC scrutiny on its $8.5 bn MGM acquisition.
- Amazon repurchased $6.0 bn shares in 1H22, which were the first buybacks in 10 years, although the company has not repurchased any shares since then.
Key Metric
AS OF 11 Aug 2023| $ mn | 2019 | 2020 | 2021 | 2022 | LTM 2Q23 |
|---|---|---|---|---|---|
| Revenue YoY % | 20.5% | 37.6% | 21.7% | 9.4% | 10.7% |
| EBITDA | 43,394 | 57,284 | 71,994 | 74,593 | 87,648 |
| EBITDA Margin | 15.5% | 14.8% | 15.3% | 14.5% | 16.3% |
| CapEx % of Sales | 4.5% | 9.1% | 11.8% | 11.3% | 10.0% |
| Sh. Ret. % of CFO-CapEx | 0% | 0% | 0% | (52%) | 0% |
| Net Debt | (30,201) | (50,497) | (44,771) | 7,316 | 7,902 |
| Gross Leverage | 0.6x | 0.6x | 0.7x | 1.0x | 0.8x |
| EV / EBITDA | 20.8x | 28.3x | 23.3x | 11.7x | 15.6x |
CreditSight View Comment
AS OF 21 Dec 2023We continue to have confidence in CEO Andy Jassy and the long-term business for both AWS and consumer. The 3Q23 results support our view as AWS growth has stabilized, AWS and North America both had record profits, and International nearly reached breakeven profitability. We expect AWS to remain a profitable growth driver for the foreseeable future, and the North America segment to see improved profitability driven by operating leverage, cost reductions, and productivity gains including the regionalization of its fulfillment network. We estimate gross leverage declined sharply to 0.6x or 1.4x on a lease-adjusted basis. We think Amazon should be able to address the FTC’s concerns with behavioral remedies and fines, and we view a breakup as unlikely.
Recommendation Reviewed: December 21, 2023
Recommendation Changed: December 21, 2023
Who We Recommend
ING Groep
Reliance Industries
BNP Paribas