The $2.8 billion fine levied on Starbucks in light of its 2011
termination of a distribution agreement with Kraft has already been
factored into ratings and is manageable, according to Fitch Ratings.
Fitch assigned an initial rating and outlook of 'A-/F2 Stable' to
Starbucks Corporation (NASDAQ: SBUX) on Sept. 3, 2013. Ratings
incorporated Starbucks' low financial leverage, significant cash flow,
and a potential $2 billion-$3 billion cash payment related to its
arbitration with Kraft Foods Group, Inc. The Ratings Outlook is Stable.
Starbucks Tuesday announced that as a result of the arbitrator's ruling,
it will be required to pay $2.23 billion in damages plus prejudgment
interest and attorneys' fees, which Starbucks estimates at approximately
$557 million. While the amount is at the high end of Fitch's
expectations, Starbucks has substantial liquidity and financial
flexibility to satisfy this obligation.
Payment will be funded with cash on hand, which totaled $2.6 billion at
Sept. 29, 2013, and $750 million of incremental debt to be issued within
the next three months. Starbucks currently has $1.3 billion of total
debt. The firm does not expect to repatriate cash to fund the payment.
At the fiscal year ended Sept. 29, 2013, total debt-to-operating EBITDA
was approximately 0.4x and total adjusted debt-to-operating EBITDAR,
which capitalizes leases at 8x gross rents, was roughly 2.0x. Pro forma
for the above mentioned issuance, metrics are 0.7x and 2.2x,
respectively. Ratings incorporate Fitch's expectations that
rent-adjusted leverage will remain in the low 2.0x range over the
near-to-intermediate term due to healthy operating earnings and cash
flow growth.
Starbucks maintained its fiscal 2014 financial targets, which Fitch
views as achievable, following its announcement of the settlement.
Starbucks expects at least 10% revenue growth, with mid-single digit
global same-store sales (SSS) growth, and consolidated operating margin
expansion of 150 - 200 basis points (bps) for 2014. During fiscal 2013,
revenue grew 12% to $14.9 billion, operating income increased 23% to
$2.5 billion, and operating margins expanded 150 bps to 16.5%. Growth is
being driven by industry-leading SSS trends, unit expansion, channel
development and favorable coffee costs.
Additional information is available on www.fitchratings.com.
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