Fitch Rates Starbucks' Proposed $750MM Notes Issuance 'A-'

CHICAGO--()--Fitch Ratings has assigned an 'A-' rating to Starbucks Corporation's (Starbucks; NASDAQ: SBUX) proposed $750 million aggregate issuance of fixed-rate seven-year and 30-year senior unsecured notes. At March 29, 2015, Starbucks had approximately $2.1 billion of total debt. A full list of Starbucks' ratings is provided at the end of this release.

The notes will be issued under Starbucks' Aug. 23, 2007 indenture and will rank equally with existing senior unsecured debt. Terms include a change of control triggering event provision. Proceeds will be used for general corporate purposes which include paying off $550 million of 6.25% notes due Aug. 15, 2017 and potential share repurchases.

KEY RATING DRIVERS

Strong Credit Metrics:

Starbucks' good operating performance and balanced financial strategy has resulted in strong credit metrics that are in line with Fitch's expectations. For the latest 12 months (LTM) period ended March 29, 2015, total adjusted debt/operating EBITDAR (defined as total debt plus 8x gross rents-to-operating EBITDA plus gross rents) was 1.9x, operating EBITDAR/gross interest expense plus rent was 4.7x, and funds from operations (FFO) fixed charge coverage was 4.4x. Fitch expects metrics to remain near current levels for fiscal 2015 and 2016.

Balanced Financial Strategy:

Starbucks' cash flow from operations (CFFO) totaled $2 billion for the first two quarters of fiscal 2015. Excluding last year's one-time $2.8 billion cash payment related to the Kraft Foods Group arbitration, CFFO grew 12%. Cash flow priorities are to reinvest and return cash to shareholders. Starbucks targets a dividend payout to net income ratio of 35%-45%, which Fitch views as reasonable versus peers. Share repurchases totaled $346.4 million during the first two quarters of fiscal 2015, compared to $290 million in the same period last year.

Robust Operating Trends:

Starbucks' operating results are being enabled by mid-single-digit same store sales (SSS) growth, increasing points of distribution, and management's ability to effectively manage through volatile coffee cost environments. Revenue and reported operating income grew at an 11% and 21% compound annual growth rate (CAGR), respectively, from fiscal 2010 to fiscal 2014. Global SSS have risen 5% or more for 21 consecutive quarters, rising 7% in the quarter ended March 29, 2015 due to a 3% rise in transactions and a 4% increase in average ticket. Starbucks is on track to open 1,650 net new units in fiscal 2015, representing nearly 8% expansion, opening 722 net new stores during the first two quarters of the fiscal year.

Strong Brand Equity, Leadership:

Starbucks' leadership in coffee, well-recognized brand, growing food, tea and juice menu offerings, and ability to engage customers with the company's rewards program and mobile order and payment systems should help sustain mid-single-digit SSS growth. Moreover, increased distribution within grocery and other retail outlets is incremental to revenue and helps strengthen brand equity and customer loyalty.

KEY ASSUMPTIONS

--Total revenue increases at a mid-teens rate in fiscal 2015, driven by mid-single-digit SSS, high-single-digit net unit growth, consumer packaged goods sales, and incremental revenue from the acquisition of Starbucks Coffee Japan, Ltd.;

--In fiscal 2016, annual revenue grows in line to slightly higher than the company's 11% historical compound annual growth rate from 2010 to 2014 due to mid-single SSS, high-single-digit net unit growth, and consumer packaged good sales.

--Modest margin expansion in fiscal 2015 and 2016 due to top line growth, slight favourability for coffee cost in fiscal 2015, and general and administrative expense management.

--Annual free cash flow (FCF) approximates $1 billion or more in fiscal 2015 and 2016;

--Total adjusted debt-to-operating EBITDAR of around 2.0x, operating EBITDAR/gross interest expense plus rent approximating 4.5x, and FFO fixed charge coverage of roughly 4.0x in fiscal 2015 and 2016.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--Fitch's expectation that total adjusted debt-to-operating EBITDAR would be maintained below 2.0x due to cash flow growth and a balanced financial strategy;

--SSS trends remaining near or above industry peers;

--Stable to improving margins; and

--Increased diversification within food, given increasing competition in the coffee category.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Fitch's expectation that total adjusted debt-to-operating EBITDAR would increase to and be sustained above the mid-2.0x range;

--Debt-financed dividends or share repurchases concurrent with weakening operating trends;

--Persistent SSS declines and/or loss of market share;

--Material margin contraction; and

--Significantly lower than expected FCF.

LIQUIDITY AND DEBT STRUCTURE

Starbucks' liquidity is ample and is supported by its good cash flow generation. At March 29, 2015, the company had $2.6 billion of liquidity consisting of approximately $1.8 billion of cash and short-term investments, and full availability under a $750 million revolver. Starbucks' revolver, which expires Jan. 21, 2020, can be upsized to $1.5 billion. Amounts outstanding under the company's $1 billion commercial paper (CP) program are backstopped by available commitments under the revolver. There was no CP outstanding at March 29, 2015. Maturities over the next three fiscal years include $400 million 0.875% notes due December 2016, $550 million 6.25% notes due August 2017, and $350 million 2% notes due December 2018. As mentioned above, Starbucks intends to refinance the 2017 notes.

Fitch currently rates Starbucks' debt as follows:

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

--Bank credit facility 'A-';

--Senior unsecured debt 'A-';

--Short-term IDR 'F2'.

Date of Relevant Rating Committee: Sept. 16, 2014.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

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

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985664

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael L. Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Michael L. Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com