Starbucks Corporation · NASDAQ:SBUX
Starbucks — Grant's Fall 2018 Conference
44 slides from Starbucks's conference presentation, Oct 9, 2018
Slide 1: Doppio
Doppio October 9, 2018 Pershing Square Capital Management, L.P.
Slide 2: Disclaimer
Disclaimer The analyses and conclusions of Pershing Square Capital Management, L.P. ("Pershing Square") contained in this presentation are based on publicly available information. Pershing Square recognizes that there may be nonpublic information in the possession of the companies discussed in this
Slide 3: Overview
Overview Leading global specialty coffee retailer and iconic brand 29,000 stores with over $32 billion in systemwide sales Ticker: 50% U.S., 50% International “SBUX” 53% Owned (U.S. 60%,China 100%, RoW 30%), 47% Licensed Stock Price: $56 Div. Yield: Americas (primarily U.S.) = 67% of EBIT,
Slide 4: Long-Term Share Price Outperformance
Long-Term Share Price Outperformance SBUX has generated an annualized TSR of 26% over the last ten years, twice the return of the S&P 500 over the same period Share Price From 10/5/2008 to 10/5/2018 $70 Annualized TSR $60 10-Year 15-Year 20-Year SBUX 26% 15% 18% $56 S&P 500 13% 9% 8% $50 $40 $30 $20
Slide 5: Share Price Down Over the Last 3 Years
Share Price Down Over the Last 3 Years Starbucks shares are down 6% over the last three years. Including dividends, shareholders have earned a 0% total return, despite EPS growth of ~50% Share Price From 10/5/2015 to 10/5/2018 $70 U.S. corporate tax reform boosts earnings by ~11% before reinvestment
Slide 6: Current P/E at a Discount to Recent History
Current P/E at a Discount to Recent History Starbucks is trading at 22x consensus P/E today, a substantial discount to recent historical averages of ~26x NTM Forward P/E From 10/5/2008 to 10/5/2018 Average P/E: 35x 3-Yr 25.9x 5-Yr 26.7x 30x 10-Yr 24.4x 25x 22.1x 20x 15x 10x 5x 0x 10/5/08 10/5/09 10/
Slide 7: Investment Highlights
Investment Highlights Category killer in away-from-home coffee with leading omnichannel presence ▪ Quality and innovation advantage over low-cost coffee and traditional QSR players ▪ Convenience, technological and cost advantage over high-end, boutique players Premium coffee is a secularly growing a
Slide 8: Investment Highlights (Cont.)
Investment Highlights (Cont.) Long runway for unit growth in the high-single-digits ▪ Robust international unit growth led by China as well as other underpenetrated countries ▪ Incremental penetration opportunity in the U.S. Track record of consistent growth in same-store sales and transactions ▪ Lo
Slide 9: Best-in-Class Unit Economics
Best-in-Class Unit Economics Continued store growth in Starbucks’ largest owned markets is supported by industry-leading unit economics New Units Economics: Starbucks vs. Other High-Return Concepts ($‘000s) U.S. – Pretax ROI China – Pretax ROI 86% 66% 59% 38% Store Build Cost $680 $1,280 $300 $380 A
Slide 10: Exceptional Returns on New Unit Capex
Exceptional Returns on New Unit Capex We estimate that every dollar Starbucks spends building a new store in the U.S. or China is worth $10 to $15 shortly after the store opens Illustrative Value of Each New Store at SBUX Base Case Valuation Multiple ($‘000s) U.S. China $7,440 10.9x Return $4,650 15
Slide 11: Value of Starbucks China Increasingly Important
Value of Starbucks China Increasingly Important China will become increasingly important to the value of Starbucks over time as it represents Starbucks’ single-largest unit growth opportunity with the best store-level unit economics Starbucks Earnings Mix by Geography: 15% CAGR 13% 17% 8% CAGR 20% 2
Slide 12: Accelerated Capital Return Plan
Accelerated Capital Return Plan Management has announced a share repurchase plan of ~$14bn over the next two years, nearly 20% of the current market cap Starbucks Annual Share Repurchases (FYE Sept. 30, $bn) $10.0 21% 20% $5bn in after-tax 18% proceeds from Nestle CPG sale (received 8/28/18) 13% $5.
Slide 13: Key Drivers of Recent Stock Price Weakness
Key Drivers of Recent Stock Price Weakness Slowdown in U.S. same-store sales Reduction in long-term growth targets Leadership transition and management turnover 12
Slide 14: Industry Context
Industry Context
Slide 15: Coffee is a Secularly Attractive Category
Coffee is a Secularly Attractive Category Within total coffee, premium products are outgrowing traditional offerings and away-from-home is gaining share from at-home Source: Keurig Dr. Pepper investor day, March 20, 2018. 14
Slide 16: Strategic Investment in Coffee is Accelerating
Strategic Investment in Coffee is Accelerating Over $100bn in coffee-related acquisitions have been completed since 2012, at valuations that average ~20% more than where SBUX now trades TEV / EBITDA for Coffee-Related Transactions 2012 2013 2014 2015 2016 2017 2018 YTD Total 17.4x 17.2x 16.5x 16.7x
Slide 17: Category Killer in Away-from-Home Coffee
Category Killer in Away-from-Home Coffee Starbucks’ global market share in specialist coffee shops is 15x larger than the #2 player and over 3.5x larger than the other top 10 players combined Specialist Coffee Shop Global Market Share for Top 10 Players, 2017 46.2% Memo: Systemwide Sales - Last FY,
Slide 18: Global Growth Opportunity in At-Home Coffee
Global Growth Opportunity in At-Home Coffee Starbucks is the leading packaged coffee brand in the U.S., with significant white space overseas unlocked by the recent Nestle deal Packaged Coffee Market Share in Top 20 Markets, 2017 Consideration to SBUX from Nestle Upfront cash payment of $7.15bn
Slide 19: Business Overview
Business Overview
Slide 20: Strong Historical SSS Growth: Total
Strong Historical SSS Growth: Total Over the last 13 years, Starbucks’ same-store sales (“SSS”) growth has averaged 5%, split evenly between transactions and ticket Total SSS Growth: FY 2005 to 2018 YTD 8% 8% 7% 7% 7% 7% 7% 6% 6% 5% ’05-’17 Avg.: 5% 3% 2% (3%) (6%) 2005 2006 2007 2008 2009 2010 2011
Slide 21: Strong Historical SSS Growth: Americas
Strong Historical SSS Growth: Americas Since 2008, Starbucks’ Americas segment (primarily U.S.) SSS growth has averaged 5%, split evenly between transactions and ticket Americas SSS Growth: FY 2009 to 2018 YTD 8% 8% 8% 7% 2% 6% 7% ’09-’17 2% 2% 6% Avg.: 5% 4% 4% 3% 5% 2% 3% 6% 5% 5% 4% 3% 3% 3% 2% 2
Slide 22: Strong Historical Unit Growth: Total
Strong Historical Unit Growth: Total Since 2010, Starbucks has grown units at an 8% annual rate, with balanced growth between owned and licensed units Total Units (‘000s): FY 2010 to 2018E 29.3 27.0 24.7 22.6 21.0 19.3 18.0 16.3 16.9 2010 2011 2012 2013 2014 2015 2016 2017 2018E Owned Licensed Sourc
Slide 23: Strong Historical Unit Growth: Total (Cont.)
Strong Historical Unit Growth: Total (Cont.) Since 2010, Starbucks unit growth has been primarily driven by growth outside the U.S., which has averaged 12%, while the U.S. has averaged 4% U.S. & Rest of World Units (‘000s): FY 2010 to 2018E FY 2010 to 2018E CAGR: U.S. 4% Rest of World 12% 14.6 14.7
Slide 24: Incremental Penetration Opportunity in the U.S.
Incremental Penetration Opportunity in the U.S. While Starbucks currently has more than 14,000 stores in the U.S., it is still relatively underpenetrated in the Midwest and South Population per Starbucks Company-Operated Stores Source: SBUX investor presentation, June 19, 2018. 23
Slide 25: Well-Insulated from Wage Pressures in the U.S.
Well-Insulated from Wage Pressures in the U.S. We believe that Starbucks is one of the most well-positioned retailers if minimum wages rise due to its “partner” compensation philosophy ✓ Entry-level pay above the minimum wage in all 50 states ✓ Superior benefits for part-time workers since the 1990s
Slide 26: Strong International Unit Growth Led by China
Strong International Unit Growth Led by China Robust international unit growth should continue, led by China and other significantly underpenetrated regions overseas China & Rest of World (Ex-China) Units (‘000s): FY 2010 to 2018E FY 2010 to 2018E CAGR: 11.1 China 31% 10.1 Rest of World (Ex-China) 1
Slide 27: Long Runway for Growth in China
Long Runway for Growth in China Starbucks plans to nearly double its units in China over the next four years, and estimates that China will ultimately surpass the size of the U.S. business Starbucks Store Count in China (‘000s) 14.4 + 6.0 3.5 2018E 2022E Long-Term Potential (Pershing Square Est.) (M
Slide 28: Wide Competitive Moat in China
Wide Competitive Moat in China While competition in China has recently intensified, we believe that Starbucks has a defensible moat underpinned by several key advantages ✓ Global brand operating in China for nearly 20 years ▪ Synonymous with the highest-quality coffee and a premium “third-place” exp
Slide 29: Situation Overview
Situation Overview
Slide 30: Recent Same Store Sales Growth: Americas
Recent Same Store Sales Growth: Americas Americas SSS growth has steadily decelerated since the beginning of FY 2016 and transactions have been roughly flat since the end of FY 2016 Americas SSS Growth: FQ1 2016 to FQ3 2018 9% 7% 5% 5% 3% 5% 5% 4% 3% 1% 3% 2% 6% 2% 5% 5% 4% 4% 4% 2% 4% 3% 3% 2% 1% (
Slide 31: Recent Same Store Sales Growth: Americas (Cont.)
Recent Same Store Sales Growth: Americas (Cont.) The deceleration in SSS growth since FY 2016 has been primarily driven by weakness in Frappuccino and some softness in core beverage platforms U.S. Company-Operated SSS Growth Contribution by Product: FY 2015 to 2018 YTD % of Rev. 2015 2016 2017 9M'18
Slide 32: Reduced Long-Term Growth Targets
Reduced Long-Term Growth Targets The recent slowdown in same-store sales was the driving force for the reduction in Starbucks’ long-term financial growth targets at the end of FY 2017 Long-Term Financial Targets Previous Revised (Q4 '17) Same-Store Sales Growth Mid-Single-Digits 3% to 5% Revenue Gro
Slide 33: Potential Causes of U.S. SSS Weakness
Potential Causes of U.S. SSS Weakness Increased competition at the high and low-end ▪ Boutique coffee shops offer more premium options than Starbucks ▪ McDonald’s $2 small espresso-based drinks appeal to cost-conscious customers Rapid acceptance of mobile order & pay (“MO&P”) caused traffic cong
Slide 34: Actions to Address U.S. SSS Weakness
Actions to Address U.S. SSS Weakness Management has announced a series of actions to reinvigorate U.S. SSS growth over the next several years ✓ Focus on premium product innovation and new boutique store concepts ▪ New store concepts (Roastery and Reserve) provide Starbucks with a brand halo and pipe
Slide 35: Actions to Address U.S. SSS Weakness (Cont.)
Actions to Address U.S. SSS Weakness (Cont.) Management has announced a series of actions to reinvigorate U.S. SSS growth over the next several years ✓ Upcoming loyalty program improvements will provide more benefit to low-ticket, high-frequency customers and focus on customized offers ▪ Lower redem
Slide 36: Thoughts on Current Leadership Team
Thoughts on Current Leadership Team Recent actions by new CEO Kevin Johnson are encouraging Portfolio restructuring: Nestle CPG and Tazo transactions, closure of Teavana stores, improved mix of owned and licensed businesses Significant cost reduction initiative: SG&A target of 3.5% of systemwi
Slide 37: Financials & Valuation
Financials & Valuation
Slide 38: Recent Financial Performance
Recent Financial Performance SBUX has grown EPS in the mid to high-teens driven by revenue growth from SSS and new units, as well as operating leverage and buybacks ($ in millions | FYE Sept. 30) 53rd Wk CAGR 2013 2014 2015 2016 2017 2018E '13-'18E Revenue $14,867 $16,448 $19,163 $21,316 $22,387 $24
Slide 39: Projected SSS Growth
Projected SSS Growth We conservatively estimate that SBUX should be able to generate SSS growth of at least 3% in the U.S., with 5% achievable even if Frappuccino continues to decline U.S. Same-Store Sales Growth Framework % of Est. YoY Growth Contribution to SSS Revenue Base Upside Base Upside Core
Slide 40: Projected Net Unit Growth
Projected Net Unit Growth We forecast high-single-digit revenue growth underpinned by ~7% annual net unit growth led by China as well as other underpenetrated regions Projected Unit Count at Year-End '18E-'22E Net Unit CAGR U.S. 3% China 14% Rest of World 8% Consolidated 7% 37.8 35.4 33.2 31.1 29.3
Slide 41: Projected EPS Growth
Projected EPS Growth We believe that SBUX’s robust unit growth pipeline combined with management’s sizeable capital return plan will drive EPS growth including dividends in the mid-teens or higher over the next four years Projected EPS Growth Bridge: 2018E to 2022E CAGR 19% 2% 1% 14% 2% 3% 11% 8% 6%
Slide 42: Valuation Range
Valuation Range If SSS and valuation revert closer to historical average levels, we believe that SBUX shares can more than double over the next three years Summary Valuation Base Upside 2022E EPS $3.70 $4.35 '18E-'22E CAGR 11% 16% '22E YoY Growth 12% 17% P/E Multiple 25.0x 27.0x Implied Share Price
Slide 43: Valuation Range: Downside Sensitivity
Valuation Range: Downside Sensitivity We estimate that SBUX will generate a three-year IRR of at least 12% if annual EPS growth is ≥ 9% and its P/E multiple is ≥ 21x EPS CAGR Sensitivity 3-Year IRR Sensitivity '18E-'22E EPS CAGR 3-Year IRR Same-Store Sales CAGR: '18E-'22E P/E Multiple 1% 2% 3% 4% 21
Slide 44: Starbucks: Summary Investment Thesis
Starbucks: Summary Investment Thesis Dominant brand in the secularly growing and attractive coffee category Strong unit economics and customer value proposition proven over decades Long-term HSD revenue growth is underpinned by international unit growth Recent slowdown in U.S. SSS is fixable with re