December 8, 2014 / 10:58 PM / 3 years ago

Fitch: Starbucks' 5-Yr Growth Plan Could Yield $7B Plus Total FCF

(The following statement was released by the rating agency) CHICAGO, December 08 (Fitch) According to Fitch Ratings, Starbucks Corporation's (Starbucks: Fitch IDRs 'A-/F2') five-year plan to accelerate profitable growth is more than achievable. Based on Fitch's preliminary estimates, which conservatively assume annual capex of roughly 7% of revenue and the maintenance of Starbucks' 35%-45% dividend payout target, cumulative free cash flow (FCF) could exceed $7 billion over the next five years. On Dec. 4, Starbucks detailed a well-articulated plan to increase annual revenue to nearly $30 billion from $16.4 billion by the end of fiscal 2019. The company also outlined a strategy to grow cost of goods sold and G&A expense at a slower rate than revenue. The run-rate of cost of goods sold is expected to be reduced by a cumulative $1 billion over the next four years due to efforts around supply chain, sourcing, waste, product mix, and other items. Fitch expects revenue growth to continue to benefit from favorable global coffee consumption trends and further strengthening of the Starbucks' brand while being driven by the company's multiple sales platforms. Starbucks is experiencing system-wide net new unit growth in the mid- to high-single-digit range, further expanding into food across the lunch and evening day parts, growing in consumer packaged goods, and launching mobile order-and-pay nationally in 2015. The launch of the Starbucks Reserve super-premium brand and the company's ahead of the curve progress in digital are examples of how it is protecting its strong brand equity. Meanwhile, the acquisition of the remaining 60.5% share of Starbucks Coffee Japan, Ltd will add just over $1 billion of annualized revenue. Annual revenue growth of at least 10% due to mid-single-digit same-store sales and global new unit development along with the addition of supply chain savings, reduced overhead, and working capital efficiency should result in double-digit operating income growth, margin expansion and improved operating cash flow. Fitch views Starbucks' strategy favorably but believes some operating risks exist, including increased competition in global coffee and service-related challenges caused by advance mobile ordering and continued expansion in food. Credit risk, however, continues to be minimal due to the company's strong 'A-' credit profile and balanced financial strategy. Ratings reflect Starbucks' low-risk financial structure, ample liquidity, improving profitability, significant scale, market leadership, and strong brand equity. At Sept. 28, 2014, Starbucks had 21,366 stores globally and, as part of its five-year plan is targeting more than 30,000 by the end of fiscal 2019. For the latest 12 months (LTM) ended Sept. 28, 2014, total adjusted debt-to-operating EBITAR (rent-adjusted leverage) was 2.1x and operating EBITDAR-to-gross interest expense plus gross rents was 4.5x. Excluding the $2.8 billion one-time fiscal 2013 charge and corresponding fiscal 2014 payment related to the Kraft Foods Group, Inc. arbitration matter, operating income increased 25% to $3.1 billion and FCF totaled $1.4 billion. Fitch expects rent-adjusted leverage to remain in the low 2.0x range in the near term. However, total adjusted debt-to-operating EBITDAR remained near or below 2.0x due to above-average same-store sales trends and cash flow growth, and continued strong FCF generation would warrant a positive rating action. Fitch currently rates Starbucks as follows: --Long-term Issuer Default rating (IDR) 'A-'; --Bank Credit facility 'A-'; --Senior unsecured notes 'A-'; --Short-term IDR 'F2'; --Commercial paper 'F2'. The Rating Outlook is Stable. Starbucks had approximately $2 billion of total debt at Sept. 28, 2014. Contact: Primary Analyst Carla Norfleet Taylor, CFA Director +1-312-368-3195 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 William Densmore Secondary Analyst Senior Director +1-312-368-3125 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (May 2014); --'Fitch Affirms Starbucks' IDRs at 'A-/F2'; Outlook Stable' (September 2014); --'Fitch: Starbucks' Ratings Unaffected By Buyout of Japanese JV' (September 2014) Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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