Sub-sector: Retail/Grocers
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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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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 $6.0 bn shares in 1H22, which were the first buybacks in 10 years, although the company has not repurchased any shares since then.
Key Metrics
AS OF 11 Aug 2023$ 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 |
CreditSights View
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
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