Fitch: Starbucks' Ratings Unaffected By Buyout of Japanese JV

CHICAGO--()--According to Fitch Ratings, the ratings for Starbucks Corporation (Starbucks: IDRs 'A-/F2') are unaffected by the company's pending purchase of the remaining 60.5% share of Starbucks Coffee Japan, Ltd. (Starbucks Japan) that it does not already own. A list of Starbucks' current ratings is provided at the end of this press release.

The purchase price totals YEN99.5 billion (approximately $914 million) and will be primarily funded with offshore cash. At June 29, 2014, $1.3 billion of Starbucks' $2 billion of cash and investments were held in foreign subsidiaries. Starbucks expects the transaction to be completed by the first half of calendar 2015 and to be slightly accretive, excluding certain items, in year one.

Fitch views this efficient use of offshore cash as consistent with Starbucks' financial strategy given the company's cash flow priorities of investing in its business and returning cash to shareholders and goal of maintaining credit metrics in line with its current ratings. Management's plan to expand across Japan in multiple channels including CPG, licensing and food service and to potentially introduce new concepts, such as Teavana, should be further enabled by its full ownership. Fitch views Starbucks as well positioned for further success in Japan but notes that both the competitive and consumer environment in the country remains tough, particularly due to a recent increase in the consumption tax.

Starbucks Japan is a publicly traded joint venture formed in 1995 with exclusive rights to develop and operate Starbucks coffee stores in Japan. During the fiscal year ended March 31, 2014, Starbucks Japan generated approximately $1.2 billion of revenue, $153 million of EBITDA, and had no debt. The partnership ended fiscal 2013 with 1,034 stores that have margins are in the low to mid 20% range, according to Starbucks. Starbucks Japan's annual same-stores sales increased 3%-4% during the last two fiscal years per the partnership's website.

Starbucks' ratings reflect Fitch's expectation that total adjusted debt-to-operating EBITDAR (rent-adjusted leverage) will remain in the low 2.0x range over the near term. For the latest 12 months (LTM) period ended June 29, 2014, rent-adjusted leverage was 2.1x and operating EBITDAR-to-gross interest expense plus gross rents was 4.6x.

Fitch currently rates Starbucks as follows:

--Long-term Issuer Default rating (IDR) at 'A-';

--Bank Credit facility at 'A-';

--Senior unsecured notes at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

The Rating Outlook is Stable. Starbucks had approximately $2.1 billion of total debt at June 29, 2014.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014);

--'Fitch Affirms Starbucks' IDRs at 'A-/F2'; Outlook Stable' (September 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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Contacts

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
William Densmore
Secondary Analyst
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch
+1-212-908-0549
New York
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
William Densmore
Secondary Analyst
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch
+1-212-908-0549
New York
brian.bertsch@fitchratings.com