OREANDA-NEWS. November 18, 2015. Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) of Starbucks Corporation (Starbucks; NASDAQ: SBUX) to 'A/F1' from 'A-/F2'. Fitch has also assigned an 'A' rating to the company's new bank credit facility. The Ratings Outlook is Stable. A full list of Starbucks' ratings is provided at the end of this release.

KEY RATING DRIVERS

The upgrade reflects that Starbucks has exceeded Fitch's expectations related to top line growth and margins while consistently maintaining strong credit metrics. Moreover, the company continues to generate industry leading comparable sales and good operating cash flow growth. For the year ended Sept. 27, 2015, lease-adjusted leverage was 2.0x, down from 2.2x at the end of fiscal 2013. FCF (CFO less capex and dividends) was approximately \\$1.5 billion or about 8% of revenue. Fitch expects total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rent-to-operating EBITDA plus gross rent) to approximate current levels in fiscal 2016 and 2017 while FCF is projected to exceed \\$1 billion in both years.

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 cost over 90% of fiscal 2016 requirements currently locked in at slightly favorable year-over-year prices. Starbucks is also successfully executing a five-year plan detailed in December 2014. The plan entails increasing annual revenue to nearly \\$30 billion and expanding margins by slowing G&A expense growth and reducing the run-rate of cost of goods sold by a cumulative \\$1 billion.

Global comparable sales (comps) have risen 5% or more for 23 consecutive quarters and net units have increased at a high single-digit rate. Comps increased 7% in the fiscal year ended Sept. 27, 2015 with transactions up 3% and average ticket rising 4%. Cash flow from operations has increased at a 17% CAGR since 2010 to \\$3.7 billion in 2015 due mainly to double-digit operating earnings growth and margin expansion.

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.

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 are as follows:
--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 gross margin expansion and slightly lower G&A expenses;
--Annual free cash flow (FCF) exceeds \\$1.0 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 \\$2.4 billion of liquidity at Sept. 27, 2015 consisting of \\$1.6 billion of cash and short-term investments and full availability under a \\$750 million revolver expiring January 2020. Starbucks increased the size of its revolver to \\$1.5 billion in November 2015. The terms of the new facility, which is scheduled to expire Nov. 6, 2020, are substantially the same as the old facility, including 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. There was no CP outstanding at Sept. 27, 2015.

At Sept. 27, 2015, approximately 50% of Starbucks cash and investments were held in foreign subsidiaries. Fitch generally views offshore cash as not readily accessible due to a general reluctance at many firms to repatriate because of incremental tax cost. However, Starbucks utilized a significant portion of its offshore cash to finance the acquisition of the remaining 60.5% share of its Japanese joint venture during fiscal 2015.

FULL LIST OF RATING ACTIONS

Fitch has upgraded Starbucks' ratings as follows:

--Long-term IDR to 'A' from 'A-';
--Senior unsecured notes to 'A' from 'A-';
--Short-term IDR to 'F1' from 'F2';
--Commercial paper to 'F1' from 'F2'.

Fitch has also assigned an 'A' rating to Starbucks' new bank credit facility.

The Rating Outlook is Stable.