Fitch Rates Starbucks' Proposed $500MM Note Issuance 'A'

CHICAGO--()--Fitch Ratings has assigned an 'A' rating to Starbucks Corporation's (Starbucks; NASDAQ: SBUX) proposed $500 million aggregate issuance of fixed-rate five-year senior unsecured notes. At Dec. 27, 2015, Starbucks had approximately $2.3 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.

KEY RATING DRIVERS

Robust Operating Trends:

Starbucks robust operating trends are being enabled by mid to high single-digit comp growth, increased points of distribution as the company opens new units and expands via the grocery channel, and effective management of coffee costs. Starbucks has locked in nearly all of its 2016 coffee needs at slightly favorable year-over-year prices and is beginning to price its needs for 2017.

Global comparable sales (comps) have risen 5% or more for six consecutive years, and net units have increased at a high single-digit rate. Comps increased 8% in the first quarter ended Dec. 27, 2015 with transactions up 4% and average ticket rising 4%. Fitch projects comps will increase 7% in fiscal 2016.

Balanced Financial Strategy:

Starbucks has maintained strong financial discipline. Cash flow priorities are to invest in its business and return cash to shareholders. The company has maintained a dividend pay out to earnings in line with its 35% - 45% target and has been prudent with share repurchases, funding buybacks mainly with internally generated cash.

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 Dec. 27, 2015, total adjusted debt/operating EBITDAR (defined as total debt plus 8x gross rents-to-operating EBITDA plus gross rents) was 2.0x and operating EBITDAR/gross interest expense plus rent was 4.7x. Fitch expects leverage to remain near current levels for fiscal 2016.

Strong Brand Equity, Leadership

Starbucks market leadership in coffee, highly-respected brands, growing food, tea and juice menu offerings, and ability to engage customers with the My Starbucks Rewards program and mobile payment systems should help the company continue to generate mid to high single-digit comp growth over the near-term. Moreover, increased distribution within grocery and other retail outlets helps strengthen Starbucks brand equity and customer loyalty. Food currently represents approximately 20% of sales in U.S. stores and is contributing 2% - 3% to comps. The company rolled out the final phase of Mobile Order & Pay nationally across company-owned stores in September 2015 and expects to continue to deploy the capability in key markets globally.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Starbucks include:

--Revenue grows 11% - 12% in 2016 and 2017 driven by 6% - 7% comps and high-single-digit net unit growth;

--Modest EBITDA margin expansion in fiscal 2016 and 2017 due to higher gross margins and slightly lower G&A expenses;

--Annual free cash flow (FCF) exceeds $1 billion annually;

--Total adjusted debt-to-operating EBITDAR remains stable in the 2.0x range in 2016 and 2017.

RATING SENSITIVITIES

A positive rating action in the near term is not anticipated. However, a public commitment to maintaining total adjusted debt-to-operating EBITDAR in the mid-1.0x range and a continuation of currently strong operating trends could result in an upgrade.

A negative rating action would be considered if total adjusted debt-to-operating EBITDAR is sustained above the 2.0-2.2x range due to a more aggressive financial strategy, meaningful deceleration in comp growth, or material margin contraction. Materially lower than expected FCF could also contribute to a negative action.

LIQUIDITY

Starbucks had an estimated $3.9 billion of liquidity at Dec. 27, 2015 consisting of $2.4 billion of cash and short-term investments and full availability under a $1.5 billion revolving credit facility expiring Nov. 6, 2020. Approximately $1.3 billion or 48% of Starbucks cash and investments, which totalled $2.7 billion, was held in foreign subsidiaries. Terms of the facility include a minimum fixed charge coverage ratio of 2.5x. Amounts outstanding under the company's $1 billion commercial paper (CP) program are backstopped by available commitments under the revolver. At Dec. 27, 2015, there was no CP outstanding.

FULL LIST OF RATINGS

Fitch currently rates Starbucks Corporation as follows:

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

--Bank credit facility 'A';

--Senior unsecured debt 'A';

--Short-term IDR 'F1'.

Date of Relevant Rating Committee: Nov. 12, 2015

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998816

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
William Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@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
William Densmore
Senior Director
+1-312-368-3125
or
Committee Chairperson
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com