HITTING THE SUMMIT - Hedgeyedocs.hedgeye.com/HE_SBUX_APR2016.pdf · research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research

HEDGEYE 1

BEST IDEA: SHORT STARBUCKS (SBUX)April 5, 2016

HOWARD PENNEY ([email protected])SHAYNE LAIDLAW ([email protected])

HITTING THE SUMMIT

HEDGEYE 2

DISCLAIMERHedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut.Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. Thisresearch does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research ispresented without regard to individual investment preferences or risk parameters; it is general information anddoes not constitute specific investment advice. This presentation is based on information from sources believedto be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information.The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intendedsolely for the use of Hedgeye Risk Management’s clients and subscribers. In reaching these opinions andconclusions, Hedgeye Risk Management and its employees have relied upon research conducted by HedgeyeRisk Management’s employees, which is based upon sources considered credible and reliable within theindustry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information uponwhich it has relied.

TERMS OF USEThis report is intended solely for the use of its recipient. Re-distribution or republication of this report and itscontents are prohibited. For more details please refer to the appropriate sections of the Hedgeye ServicesAgreement and the Terms of Use at www.hedgeye.com

DISCLAIMER

HEDGEYE 3

PLEASE SUBMIT QUESTIONS TO

[email protected]

HEDGEYE 4

TABLE OF CONTENTS

Topics Page(s)

Hedgeye Restaurants Best Ideas List………………………………………………………………………….. 5

Key Points & Introduction…..…………………………………………………………………………….…………… 6-12

Comparable Growth Metrics.……………………………………………………………………………………….. 13-26

Capital Spending & New Store Productivity.……………………………………………………………….. 27-30

Food is Increasing Complexity…...………………………………………………………………………………… 31-48

Hedgeye Survey Series…..……………………………………………………………………………….…………… 49‐61

Loyalty Program and Mobile Order & Pay…………..…….…………………………………………..……. 62‐64

Commodities…………………………..……………………………………………………………………………….…….. 65‐67

Margin Analysis………………………………………………………………………………………………………..……. 68‐73

Valuation..……………………………………………………………………………………………………………….……… 75‐83

HEDGEYE 5

HEDGEYE RESTAURANT IDEAS LIST

LONG LIST TRADE TREND TAIL SHORT LIST TRADE TREND TAIL

1) MCD McDonald's 1) CMG Chipotle Mexican Grill X X X

2) PNRA Panera Bread Company - 2) DRI Darden Restaurants X X X

3) YUM Yum! Brands - 3) PLAY Dave & Buster's - X X

4) DFRG Del Frisco's Rest. Group - 4) SBUX Starbucks X X -

5) ZOES Zoe's Kitchen - 5) BWLD Buffalo Wild Wings X X X

6) EAT Brinker International X X -

7) SHAK Shake Shack - X X

LONG BENCH SHORT BENCH

PLKI Popeyes Louisiana Kitchen DNKN Dunkin' Brands

HABT Habit Restaurants JACK Jack In The Box

SONC Sonic BLMN Bloomin' Brands

TXRH Texas Roadhouse

QSR Restaurant Brands Int.

Bench = timing is not right, or research is in progress.

HEDGEYE 6

KEY POINTS

HIGH EXPECTATIONS FOR GROWTH IN FOOD SALES Two years ago the management of Starbucks set out big expectations for food sales in stores. So far they have delivered. How much more room is there to go? At the end of FY15 food was 19% of sales and the company has a goal of getting it to 25% over the next 4 years. We think that is going to be difficult to achieve and the contribution to growth will slow meaningfully over the next 12 months.

TECHNOLOGY DRIVING INCREMENTAL GROWTHLike the potential for incremental food sales, new technology is expected to drive incremental growth at Starbucks over the next four years. At the annual meeting the company unveiled some significant changes to the Starbucks app and the loyalty program. Will these changes continue to drive significant throughput or will it see incremental adoption slow? Importantly, 2Q16 results will tell us more about the potential for the new technology.

Since 2009, the margin expansion story at Starbucks has been extraordinary. Since the lows of 2009, on a trailing 12-months basis, operating margins have improved 1,301bps. Over the next 12 months margins are only estimated to improve 116bps. Over the last 12-months food comp growth represented ~31% of Americas total comp, average check accounted for 53.1% of the comp, if those slow incrementally, margin improvement will be difficult to achieve.

2

3 FLOW THROUGH

11

DATA SOURCE: COMPANY FILINGS, HEDGEYE RISK MANAGEMENT.

HEDGEYE 7

BUSINESS MIX BREAKDOWN

DATA SOURCE: COMPANY FILINGS, HEDGEYE RISK MANAGEMENT.

Revenue by Segment Store Count by Region

FY2015 Revenue = $19.2 billion Total Units as of 4Q15= 23,043

Americas69%

China/Asia Pacific

13%

EMEA6%

Channel Development

9%

Other3%

Americas64%

China/Asia Pacific24%

EMEA10%

Other2%

HEDGEYE 8

PRICE PERFORMANCE VS. QUICK SERVICE COMP SET

THE STOCK HAS SIGNIFICANTLY OUTPERFORMED ITS PEERS IN THE LAST 52 WEEK PERIOD

DATA SOURCE: FACTSET, COMP SET = MCD, YUM, CMG, PNRA, WEN, DNKN, KKD, DPZ, SONC, PLKI, QSR.

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar90

95

100

105

110

115

120

125

130

135

140

109.31

129.29

Starbucks Corporation Daily61.02 0.00 0.00% VWAP:61.06 High: 134.57 Low: 99.66 Chg: 29.29%

(INDEX) Starbucks Corporation - Price (INDEX) Index:Personal:Comp_Set_For_Sbux.Ofdb - Price

HEDGEYE 9

PRICE PERFORMANCETHE STOCK IS CURRENTLY TRADING AT 95% OF ITS 52 WEEK HIGH

DATA SOURCE: FACTSET.

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar46

48

50

52

54

56

58

60

62

64

66

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

15.84

60.25

Starbucks Corporation Daily60.25 0.00 0.00% VWAP:59.92 High: 63.51 Low: 47.04 Chg: 27.65%

Starbucks Corporation - Price Starbucks Corporation - EV/EBITDA - NTM

HEDGEYE 10

COMPANY DASHBOARD

Starbucks Corporation 60.25$ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION

(FY ends Dec.) NTM 2016E 2017E 2018E (Consensus in mm) NTM FY2016E FY2017E Stock Price 60.25$ Hedgeye EPS $2.02 $1.87 $2.15 $2.43 Sales $22,499 $21,523 $23,427 Shares Outstanding 1485.6% Chg YoY 18.4% 15.0% 13.0% % Chg YoY 12.3% 8.8% Market Cap 89,507.4$ Consensus $1.99 $1.89 $2.19 $2.52 EBITDA $5,619 $5,278 $5,943 + Net Debt (32.2)$ % Chg YoY 19.8% 15.6% 15.1% % Chg YoY 16.6% 12.6% + Preferred Equity ‐$ Variance % ‐1.2% ‐1.7% ‐3.5% EBITDA Margin* 25.0% 24.5% 25.4% + Minority Interest 1.9$

P/E 28.8X 31.2X 27.0X 23.8X EV/EBITDA 15.9X 17.0X 15.1X Enterprise Value 89,477.1$

INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA 5,618.7$ 1) Category leading brand 1) Losing focus on core product line NTM EV/EBITDA 15.9x2) Tech Innovation remains strong 2) Competition NTM EPS 2.04$

3) Valuation NTM P/E 29.5x 1X Turn 3.78$ Upside/Downside 6.3%

*Consensus EBITDA MarginSource: Factset, Company Filings

©HEDGEYE RISK MANAGEMENT

HEDGEYE 11

COMPANY-OWNED RESTAURANT REVENUE GROWTH

• The YoY growth in FY15 benefited from the consolidation of the Japan JV

• The acceleration in 2-year numbers for the balance of 2016 is aggressive

DATA SOURCE: COMPANY FILINGS, CONSENSUS METRIX.

11.4%

9.9%

8.2% 7.9%

9.4%

11.4%

14.2%

12.9%

11.8%

9.3%10.2%

8.8%

12.8%

18.1%19.0%18.7%

11.6%

9.4% 9.2%

17.4%

10.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY Change 2YR - YoY Change

HEDGEYE 12

EPS GROWTH

• The estimate in 4Q16 looks very aggressive and will likely come down

• The 53rd week adds $0.06 to 4Q16 results, which would result in comparable EPS of $0.49, 14% growth YoY


$0.28$0.26 $0.27

$0.31

$0.35

$0.28

$0.34

$0.37

$0.40

$0.33

$0.42 $0.43

$0.46

$0.39

$0.49

$0.55 $0.55

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

EPS YoY Change

COMPARABLE GROWTH METRICS

HEDGEYE 14

PERFECTION BUILT INTO THE PRICE

GLOBAL SAME-STORE SALES• 1Q16 was the 24th

consecutive quarter of comp growth of 5% or greater

• The consensus has clearly become accustom to expecting great results from Starbucks, and hence believes managements lofty projections for food sales in particular

• Looking out into 2019 consensus estimates are projecting SSS to be +4.7%, much of which is dependent on the growth of food to 25% of the business from its current 19% share

• We believe over the coming quarters we will see sequential slowing in food growth, although still positive it will not be going at the management projected rate


9.0%

7.0%

6.0% 6.0% 6.0% 6.0%

8.0%

7.0%

5.0%

6.0% 6.0%

5.0% 5.0%

7.0% 7.0%

8.0% 8.0%

6.5%6.0% 6.2%

5.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

Consolidated SSS Two-Year Avg.

HEDGEYE 15

HEADED INTO A TOUGH STRETCH OF COMPS

GLOBAL TRAFFIC• Global traffic growth was

driven by a strong holiday season

• Introduced key product innovation, highlighted by the Holiday Spice Flat White and an expanded holiday food menu

• In 2Q16, SBUX will be going against their toughest comp in the last four quarters since 1Q14, and the Street is only modeling a 40bps decline sequentially, which still represents 50bps of expansion on the two year average

• Can SBUX continue to grow traffic at this rate globally, or will growth slow more than both management and consensus are thinking?


7.0%

6.0%

5.0% 5.0%

4.0% 4.0%

7.0%

5.0%

4.0%

2.0% 2.0%

1.0%

2.0%

3.0%

4.0% 4.0% 4.0%3.6%

2.9% 2.9% 2.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

Consolidated Traffic Two-Year Avg.

HEDGEYE 16

NO CONCEPT CAN PRICE AGGRESSIVELY FOREVER

GLOBAL AVERAGE CHECK

• Caffeine is an addiction, and with SBUX’s more affluent customer base, they likely have more pricing power than most companies

• But it gets to a point where fringe customers and non-everyday customers start drifting away due to rapid price escalation

• The fringe customers are SBUX’s opportunity for growth, and to the extent they are lost to local coffee shops or mainstream competitors that will inhibit growth


2.0%

1.0%

2.0%

1.0%

2.0% 2.0% 2.0% 2.0%

1.0%

3.0%

4.0% 4.0%

3.0%

4.0%

3.0%

4.0%

5.0%

3.3%3.5% 3.4%

2.6%

0%

1%

2%

3%

4%

5%

6%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

Consolidated Avg. Check Two-Year Avg.

HEDGEYE 17

FOOD WILL NOT ADD THE INCREMENTAL GROWTH IN THE LONG RUN THAT IS EXPECTED

AMERICAS SAME-STORE SALES• The performance that

Starbucks has had is truly amazing, but not all great things last forever

• Core offerings in blended espresso and iced beverage platforms including the innovation in Teavana Shaken iced teas and cold brewed coffee were key contributors of growth driving 4 points of comp in the U.S. in 1Q16

• Food revenue was up 20%, contributing 3 points to the U.S. comp sales in 1Q16

• Food business grew in all dayparts, with Bistro Boxes up 65%

• The consensus is modeling stable 2-year trends


9.0%

8.0%

7.0% 7.0% 7.0%

6.0%

9.0%

8.0%

5.0%

6.0% 6.0%

5.0% 5.0%

7.0%

8.0% 8.0%

9.0%

7.2%

6.5% 6.3%

5.3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

Americas SSS Two-Year Avg.

HEDGEYE 18

GROWTH IN TRAFFIC DEPENDENT ON MOBILE ORDER & PAY

AMERICAS TRAFFIC

• The stock will struggle if Mobile Order & Pay does not accelerate traffic for the balance of FY16

DATA SOURCE: COMPANY FILINGS, CONSENSUS METRIX, HEDGEYE ESTIMATES.

7.0% 7.0%

5.0% 5.0% 5.0% 5.0%

7.0%

5.0%

4.0%

2.0% 2.0%

1.0%

2.0% 2.0%

4.0% 4.0% 4.0% 4.0%

2.3% 2.3%2.1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

Americas Traffic Two-Year Avg.

HEDGEYE 19

AMERICAS AVERAGE CHECK

• Average check has been a significant component of SSS for the past 2 years.

• When will that slow down?


2.0%

1.0%

2.0% 2.0%

3.0%

2.0% 2.0%

3.0%

1.0%

3.0%

4.0% 4.0%

3.0%

5.0%

4.0%

5.0% 5.0%

3.2%

4.3%4.0%

3.2%

0%

1%

2%

3%

4%

5%

6%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

Americas Avg. Check Two-Year Avg.

HEDGEYE 20

EMEA SAME-STORE SALES• “Dramatic decline in

consumer and tourist activity across many of Western Europe’s largest cities following the horrific November 15 terrorist attack in Paris.” were cited as a primary reason for the disappointing results

• EMEA ended the quarter with 71% of locations being licensed, up from 63% in 1Q15, which further reduces volatility in this market

• New markets for EMEA in 2016 include South Africa and Luxembourg

• There continues to be unrest in Europe, and companies such as SBUX are not immune to its affects


2.0%

-1.0%

0.0%

-1.0% -1.0%

-2.0%

2.0% 2.0%

5.0%

6.0%

3.0%

5.0%

4.0%

2.0%

3.0%

5.0%

1.0%

3.6%

4.1%3.7%

3.5%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

EMEA SSS Two-Year Avg.

HEDGEYE 21

EMEA TRAFFIC

• EMEA traffic is projected to be flat year over year, and up 100bps sequentially

• Throughout the remainder of FY16 EMEA traffic two year average is set to accelerate to 2.8%


2.0%

-1.0%

0.0% 0.0%

2.0%

-2.0%

5.0%

3.0% 3.0%

5.0%

2.0% 2.0%

3.0%

2.0% 2.0%

3.0%

1.0%

2.0%

3.0%

2.5% 2.5%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

EMEA Traffic Two-Year Avg.

HEDGEYE 22

EMEA AVERAGE CHECK

• Average check contributed 0 points of growth to EMEA in 1Q16

• EMEA faces a tough comp in 4Q16, and could be in store for a miss, if 1Q16 was any indication on how the regions performance will unfold throughout the remainder of the fiscal year


1.0%

-1.0%

0.0%

-1.0%

-3.0%

-1.0%

-3.0%

-1.0%

1.0% 1.0%

2.0% 2.0%

1.0% 1.0% 1.0%

3.0%

0.0%

1.6%

1.1% 1.2%1.0%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

EMEA Avg. Check Two-Year Avg.

HEDGEYE 23

CAP SAME-STORE SALES

• For the next two quarters CAP is up against challenging comparisons

• The acceleration in 2-year trends look unjustified from our work


20.0%

18.0%

12.0%

10.0%11.0%

8.0%9.0%

8.0% 8.0%7.0% 7.0%

5.0%

8.0%

12.0%11.0%

6.0%5.0% 4.6% 5.0%

6.4%5.8%

0%

5%

10%

15%

20%

25%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

CAP SSS Two-Year Avg.

HEDGEYE 24

CAP TRAFFIC

• Traffic in the CAP region is setting up for a stabilization period, at lower more sustainable numbers

• Going up against tough 10% comps in 2Q16 and 3Q16, the region will be tested


15.0%

14.0%

8.0% 8.0% 8.0%

5.0%

8.0%

6.0%

7.0% 7.0%

6.0% 6.0%

8.0%

10.0%10.0%

6.0%

4.0%3.6%

3.0%

4.4%4.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

CAP Traffic Two-Year Avg.

HEDGEYE 25

STRUGGLING TO GROW THE AVERAGE CHECK

CAP AVERAGE CHECK

• Unlike other parts of the world driving check in CAP has been a challenge

• Will they be able to reinvigorate check growth in the region, or will they be dependent on traffic growth to grow the top line?


5.0%

4.0% 4.0%

3.0% 3.0%

4.0%

0.0%

2.0%

1.0%

0.0%

1.0%

-1.0%

0.0%

2.0%

1.0%

0.0%

3.0%

1.0%

2.0% 2.0%

1.0%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

CAP Avg. Check Two-Year Avg.

HEDGEYE 26

REGIONAL SSS COMPOSITIONSTEADY TRAFFIC GROWTH ACROSS REGIONS

DATA SOURCE: COMPANY FILINGS.

Consolidated Americas

EMEA CAP

7.0%6.0%

5.0% 5.0%4.0% 4.0%

7.0%

5.0%4.0%

2.0% 2.0%1.0%

2.0%3.0%

4.0% 4.0% 4.0%

2.0%

1.0%2.0%

1.0%2.0% 2.0%

2.0%

2.0%

1.0%

3.0%4.0%

4.0%3.0%

4.0%3.0%

4.0%5.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Consolidated Traffic Consolidated Avg. Check

7.0% 7.0%

5.0% 5.0% 5.0% 5.0%

7.0%

5.0%4.0%

2.0% 2.0%1.0%

2.0% 2.0%

4.0% 4.0% 4.0%

2.0%1.0%

2.0% 2.0%3.0%

2.0%

2.0%

3.0%

1.0%

3.0%4.0%

4.0%3.0%

5.0%

4.0%5.0% 5.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


Americas Traffic Americas Avg. Check

2.0%

-1.0%0.0% 0.0%

2.0%

-2.0%

5.0%

3.0% 3.0%

5.0%

2.0% 2.0%3.0%

2.0% 2.0%3.0%

1.0%

1.0%

-1.0%

0.0%-1.0%

-3.0%

-1.0%

-3.0%

-1.0%

1.0%

1.0%

2.0% 2.0%1.0%

1.0% 1.0%

3.0%

0.0%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%


EMEA Traffic EMEA Avg. Check

15.0% 14.0%

8.0% 8.0% 8.0%5.0%

8.0%6.0% 7.0% 7.0% 6.0% 6.0%

8.0%10.0% 10.0%

6.0%4.0%

5.0%4.0%

4.0% 3.0% 3.0%

4.0%0.0%

2.0% 1.0% 0.0% 1.0%

-1.0%

0.0%

2.0% 1.0%

0.0% 3.0%

-5%

0%

5%

10%

15%

20%

25%


CAP Traffic CAP Avg. Check

CAPITAL SPENDING & NEW STORE PRODUCTIVITY

HEDGEYE 28

CAPEX REMAINS HIGH, WHILE EBITDA GROWTH SLOWS

CAPITAL SPENDING TRENDS

• Aggressive spending on new units is a significant component to the long-term growth story

• Like other mature brands aggressive spending on new units can lead to declining ROIIC

DATA SOURCE: COMPANY FILINGS, FACTSET.

$3

93

$4

00

$3

57

$4

13

$6

44

$7

71

$1,

100

$9

85

$4

46

$4

41

$5

32

$8

56

$1,

162

$1,

161

$1,

30

4

$1,

39

2

$1,

419

$1,

43

6

36.2%

(8.5%)

38.8%

19.4%

12.1%

-20%

-10%

0%

10%

20%

30%

40%

50%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16E

20

17E

20

18E

Yo

Y E

BIT

DA

GR

ow

th

Ca

pit

al E

xp

en

dit

ure

s

CAPEX YoY EBITDA Growth

HEDGEYE 29

RETURNS WELL OFF THE PEAK

RETURN ON INCREMENTAL INVESTED CAPITAL• Quarterly price return is

equal to the trailing three months performance as of the date

• Notably, SBUX’s ROIIC is well off of its peak set in 2010, but has been steady as of late

• When compared to the previous chart, peak ROIIC coincides with a steep reduction in CAPEX

• Although everything seems fine now, could SBUX be putting too much capital in the ground? Are they becoming too mainstream and oversaturated?


-20%

-10%

0%

10%

20%

30%

40%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

De

c-0

0

Jun

-01

De

c-0

1

Jun

-02

De

c-0

2

Jun

-03

De

c-0

3

Jun

-04

De

c-0

4

Jun

-05

De

c-0

5

Jun

-06

De

c-0

6

Jun

-07

De

c-0

7

Jun

-08

De

c-0

8

Jun

-09

De

c-0

9

Jun

-10

De

c-10

Jun

-11

De

c-11

Jun

-12

De

c-12

Jun

-13

De

c-13

Jun

-14

De

c-14

Jun

-15

De

c-15

ROIIC Quarterly Price Return

Capex peaked in ’07 at $1.1bn

In FY16, Capex is projected to be

$1.4bn, 27% higher

HEDGEYE 30

ALWAYS AN IMPORTANT METRIC

AMERICAS NEW STORE PRODUCTIVITY

• Given the aggressive spending on new units, NSP will become an important metric to monitor for the SBUX


63%

31%

72%

85%81%

94%

78% 76%

42%

68%

73%

-100%

-50%

0%

50%

100%

150%

200%

250%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

New Store Productivity YoY Growth %

FOOD IS INCREASING COMPLEXITY

HEDGEYE 32

STRAYING TOO FAR FROM THE COREFOCUS ON WHAT YOU DO BEST

DATA SOURCE: COMPANY FILINGS, HEDGEYE.

The first time Starbucks ran into trouble was from the dilution of the “Starbucks Experience” as it attempted to sell books, CDs and other items that did nothing more than confuse customers and slow service times. Once again, the company is putting the deliverability of the “Starbucks Experience” at risk in order to pursue growth by moving away from its core business:

• New store formats: Will not offer the “third place” experience.

• Teavana: Management had high expectations: “Like what Starbucks did to coffee 40 years ago, we think we can do in the tea category” Unfortunately that is not going to be the case.

• La Boulange: Management expectations again were very lofty: “Incredible opportunity to bring the artistry of the best French bakery product to the U.S. marketplace in a similar way that Starbucks brought the romance of the Italian espresso bar to many” Again, not much has changed!

• Alcohol: This rollout is nothing more than a distraction that will never amount to anything.

1

2

3

4

HEDGEYE 33

SBUX HAS DONE A GOOD JOB MANAGING THE MENU

MENU EFFECT ON COMP TRENDS

• In total SBUX has done a good job managing the menu complexity

• But it’s what they are doing within their different categories that has us scratching our heads

• Particularly the increase in food items on the menu in comparison to beverages

• SBUX is a coffee company, and we don’t believe they can shake that label, and they shouldn’t want to either

DATA SOURCE: RESTAURANT RESEARCH, COMPANY FILINGS.

181177 179

215

170165 165

7.8%

8.3%

7.8%

7.0%

6.0%

7.0%7.3%

100

120

140

160

180

200

220

5%

6%

7%

8%

9%

2010 2011 2012 2013 2014 2015 2016E

Me

nu

Ite

ms

Sa

me

-Sto

re S

ale

s

Menu Items SSS

2010 2011 2012 2013 2014 2015 2016EMenu Items 181 177 179 215 170 165 165YoY Growth (2.2%) 1.1% 20.1% (20.9%) (2.9%) 0.0%

HEDGEYE 34

SBUX FOOD IMPACT ON AMERICAS COMP

• Food is driving significant comp sales

• SBUX growth in the Americas had been accelerating even with out Mobile Order & Pay

• 2Q16 needs to see further acceleration in trends for the stock to see further upside

• The significant growth dynamics are driving a premium multiple


2% 2% 2% 2% 2% 2%

3% 3%

4% 4%

3% 3%

5%

6%

5%

6%

33% 33%

40% 40%

29%

25%

38%

33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Comp Growth From Food SSS Comp ex. Food Food/Total

9%

8%8%

7%

5%5%

6%6%

HEDGEYE 35

RETAIL SALES MIX BY PRODUCT TYPE

• “Other” primarily consists of sales of ready-to-drink beverages, serveware and coffee-making equipment, among other items

• Product mix has remained relatively steady over recent history

• Management is projecting food sales to grow to 25% of the U.S. business in the next four years


74% 73% 73%

18% 18% 19%

4% 4% 3%4% 5% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015

Beverages Food Packaged and single-serve coffee and teas Other

HEDGEYE 36

2009 PROMOTIONAL CALENDAR

DATA SOURCE: RESTAURANT RESEARCH.

2Q09 3Q09 4Q09 1Q101 1

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09New

Products 2009

Tazo Tea Lattes & Infusions (Vanilla Rooibos,

London Fog, Black Tea,

Berry Chai & Apple Chai), free coffee Jan

21 - Jan 25

Instant Coffee

12 oz. cup of coffee and choice of 4 breakfast

sandwiches - $3.95, featured

coffees (Guatemala Casi Cielo, Bella Vista

F.W. Tres Rios Costa Rica)

12 oz. cup of coffee and choice of 4 breakfast

sandwiches - $3.95, featured

coffees (Columbia

Narino Supremo & Brazil Ipanema Bourbon)

Arabian Mocha Sanai coffee (limited time), Grande

Iced Coffee with milk - $1.95

Grande Iced Coffee with milk -

$1.95

Strawberry Banana Vivanno

Smoothie, whole bean coffees from

Africa (Gazebo Blend,

Rwanda & Red)

Strawberry Banana Vivanno

Smoothie, whole bean coffees from

Africa (Gazebo Blend, Rwanda

& Red)

Pumpkin Spice Latte,

Anniversary Blend

VIA instant coffee launch

(available in Columbia and Italian Roast) -$2.95 for 3 or $9.95 for 12 servings, hot chocolate,

Sulawesi Kalosi coffee

VIA instant coffee, hot chocolate,

Sulawesi Kalosi coffee, Holiday

Beverages (Carmel Brulee,

Peppermint Mocha and Gingerbread

lattes)

VIA instant coffee, hot chocolate,

Holiday Beverages

(Carmel Brulee, Peppermint Mocha and Gingerbread

lattes), Christmas

Blend Coffee

13

Breakfast sandwich promotion

HEDGEYE 37



2Q10 3Q10 4Q10 1Q111 1 1

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10# New

Products 2010

Hot drinks under 100 calories

(Skinny Cinnamon

Dolce Latte, Skinny Vanilla Latte, Tazo®

Vanilla Rooibos Full

Leaf Tea), featured coffee - Guatemala Casi

Cielo & Mexican Chiapas

Hot drinks under 100 calories

(Skinny Cinnamon Dolce

Latte, Skinny Vanilla Latte, Tazo® Vanilla Rooibos Full Leaf Tea),

featured coffee - Guatemala Casi Cielo & Mexican

Chiapas

Free pastry day March 23 with purchase of beverage, Dark Cherry Mocha, Peru

Chanchamayo, Komodo

Dragon Blend

Dark Cherry Mocha

Happy Hour (half-priced

Frappuccinos between 3 and 5 p.m.) May 7-16

Frappuccinos, frozen drinks,

Via instant coffee

Via Iced Coffee, cold drinks (iced coffee, Tazo Passion Tea Lemonade &

Caramel Frappuccino), Gazebo Blend

coffee

Via Iced Coffee, cold drinks (iced

coffee, Tazo Passion Tea Lemonade &

Caramel Frappuccino), Gazebo Blend

coffee

Pumpkin Spiced latte, Toffee

Mocha, Artisan Breakfast

Sandwiches, Anniversary

Blend

Via vanilla, cinnamon, caramel &

mocha flavored coffees,

Pumpkin Spiced latte, Toffee

Mocha, Artisan Breakfast

Sandwiches, Starbucks Reserve

BOGO Holiday drinks (11/18 -

11/21 from 2 - 5 PM), Organic

Ethiopia coffee,

Christmas Blend

Holiday Lattes (Caramel Brulee,

Peppermint Mocha &

Gingerbread), Organic

Ethiopia coffee, Christmas

Blend

18

Breakfast sandwich promotion

HEDGEYE 38



2Q11 3Q11 4Q11 1Q121 1 1 1 1


Products 2011

Organic Blue Java, Trenta (new 30+ oz.

cup), VIA French Roast,

Veggie Artisan Breakfast Sandwich

Skinny Caramel

Macchiato, Organic Blue

Java, Starbucks VIA, Veggie

Artisan breakfast sandwich

Espresso, Starbucks Petites,

Starbucks Tribute Blend,

Kona Coffee

Espresso, Starbucks Petites,

Starbucks Tribute Blend, Papua New

Guinea Arokara

Mocha Coconut and

Coconut Crème

Frappuccino, 3 Region Blend,

Rwanda Gakenke

Mocha Coconut and Coconut

Crème Frappuccino, 3 Region Blend,

Rwanda Gakenke, custom

Frappuccinos

Iced teas & coffees,

Jamaica Blue Mountain

Coffee, Bistro Sandwich

Boxes, Caramel Iced Coffee LTO

Jamaica Blue Mountain

Coffee, Bistro Sandwich

Boxes, Caramel Iced Coffee LTO

Pumpkin Spice Latte, Artisan

breakfast sandwiches, Anniversary

Blend, Guatemala de

Flor

Pumpkin Spice Latte, Caffé

Verona, Blond Roast,

Breakfast sandwich for $2 with drink

purchase 10/1 - 10/10

Skinny Peppermint

Mocha, Christmas

Blend, Buy one holiday drink get one free (11/17-11/20 from 2 pm

- 5 pm), Sun-dried Ethiopia

Harrar, Holiday Petites

(Chocolate Crème

Whoopie Pie, Peppermint

Brownie Cake Pop,

Cranberry Bliss Bar)

Christmas Blend, Sun-

dried Ethiopia Harrar, Holiday

Petites, Guatemala

Antigua Santa Catalina coffee

20

Promote Bistro Boxes for the first time, marks first real effort to grow lunch day part for food

SBUX is pushing hard on breakfast sandwich promotions to increase trial, in hopes of

building a consistent customer base

HEDGEYE 39



2Q12 3Q12 4Q12 1Q131 1 1 1 1


Products 2012

Blonde Roast, breakfast

sandwiches ($2 with

beverage purchase 1/30 -

2/4), Skinny Mochas, Blue

Java

Blonde Roast, breakfast

sandwiches, Skinny Mochas,

Blue Java

Vanilla Latte, Starbucks

Tribute Blend, Starbucks

Petites (Petite Cherry Pies, Brown Sugar

Tarts, Raspberry

Truffle Cake Pops)

Vanilla Latte, Starbucks

Tribute Blend, 2 Starbucks

Petites for $2 4/9/12

Three Region Blend, Very Berry Coffee Cake, Tazo Iced Tea,

Galapagos San Cristobal coffee, get a free tall drink

with purchase of VIA iced coffee

5/31-6/3, Mocha Cookie

Crumble Frappuccino

Mocha Cookie Dream, Three Region Blend, Mocha Cookie

Crumble Frappuccino, $1

off each Frappuccino

6/28 - 7/1

Starbucks Refreshers (made with

green coffee extract) - Cool Lime or Very

Berry Hibiscus, Indivisible

Blend, Oahu Coffee LTO, Bistro Boxes

Pumpkin Spice Latte,

Starbucks Refreshers (made with green coffee

extract) - Cool Lime or Very

Berry Hibiscus, Indivisible

Blend, Jamaica Blue Mountain Coffee, Bistro

Boxes, Starbucks

Runner Reward -Buy 4 drinks &

get 5th free 8/28-9/30

Salted Caramel Mocha, Pumpkin Pastries,

Anniversary Blend,

Starbucks Runner Reward - Buy 4 drinks &

get 5th free 8/28-9/30

Salted Caramel Mocha,

Pumpkin Pastries,

Anniversary Blend,

breakfast sandwiches

Holiday Drinks (Peppermint

Mocha, Caramel Brulee Latte, Gingerbread

Latte & Peppermint

Mocha Frappuccino), Holiday Treats

(Holiday Cranberry Bliss

Bar, Holiday Cookies), Christmas

Blend Coffee

Holiday Drinks (Peppermint

Mocha, Caramel Brulee Latte, Gingerbread

Latte & Peppermint

Mocha Frappuccino) - buy one, get

one free 12/13 - 12-16 from 2 - 5

pm, Holiday Treats (Holiday Cranberry Bliss

Bar, Holiday Cookies,

Peppermint Brownie Cake

Pop), Grandma's

Turkey sandwich, Christmas

Blend Coffee

18

Re-run of Bistro Box promotion, during the same months in the summer they did last year

After taking just two months off, SBUX was back at promoting breakfast sandwiches

HEDGEYE 40



2Q13 3Q13 4Q13 1Q141 1 1 1 1 1 1 1


Products 2013

Vanilla Spice Latte,

oatmeal, Blonde Roast

Vanilla Spice Latte, oatmeal, Blonde Roast,

Buy 5 lb. bag of coffee and get $5 Starbucks card (through

Feb. 24)

Buy 1 lb. bag of coffee, VIA 12 pack, K-Cup

packs or Verismo Pods

and get $5 Starbucks card (through Mar. 24), Hazelnut Macchiato,

Tribute Blend, Celebration of

Chocolate promotion (Chocolate Cinnamon

Bread, Cheesecake Brownie & Chocolate

Chunk Cookie)

Hazelnut Macchiato,

Tribute Blend, Celebration of

Chocolate promotion (Chocolate Cinnamon

Bread, Cheesecake Brownie & Chocolate

Chunk Cookie), Turkey Rustico

Panini, Caramel

Ribbon Crunch Frappuccino,

new sandwiches (Chicken BLT,

Ham & NY Cheddar, Turkey &

Havarti or Egg Salad) and salad bowls

(Hearty Veggie & Brown Rice

or Zesty Chicken &

Black Bean), 3 Region Blend

Half-off any Frappuccino

between 3 p.m. and 5 p.m. 5/3 - 5/12, Caramel Ribbon Crunch Frappuccino,

new sandwiches

(Chicken BLT, Ham & NY Cheddar, Turkey &



or Zesty Chicken &

Black Bean), 3 Region Blend, free tall iced

beverage with purchase of

Starbucks VIA iced coffee

Mocha Cookie Crumble &

Caramel Ribbon Crunch

Frappuccino, 3 Region Blend,

new sandwiches

(Chicken BLT, Ham & NY Cheddar, Turkey &



or Zesty Chicken &

Black Bean), Starbucks Refreshers (Very Berry Hibiscus, Valencia

Orange & Cool Lime) - half-off from 3 p.m. - 5 p.m. 6/27-6/29, Kati Kati coffee blend, Panama Carmen Estate

Any cold Grande drink - $2 after 2 PM with morning

receipt, Orange Spice Iced

Coffee, Valenica Orange

Starbucks Refreshers,

Shaken Iced Peach Green

Tea Lemonade, salad bowls

(Hearty Veggie & Brown Rice or Zesty Chicken & Black Bean), Kati Kati coffee blend, Panama Carmen blend

Orange Spice Iced Coffee,

Valencia Orange

Starbucks Refreshers, Shaken Iced Peach Green

Tea Lemonade, Salad bowls

(Hearty Veggie & Brown Rice or Zesty Chicken & Black Bean), Kati Kati coffee blend, Panama Carmen blend

Pumpkin Spice Latte, Trio of

pumpkin treats (Pumpkin

Cream Cheese Muffin, Pumpkin

Bread & Pumpkin

Scone), Via Pumpkin Spice

Coffee, Anniversary

Blend, Ethiopia blend

Salted Caramel Mocha,

Pumpkin Spice Latte, Trio of

pumpkin treats (Pumpkin

Cream Cheese Muffin, Pumpkin

Bread & Pumpkin

Scone), Via Pumpkin Spice Coffee, Ethiopia

blend, Chocolate

Chai Tea Latte

Holiday Drinks - Gingerbread

Latte, Caramel Brulee Latte, Peppermint

Mocha, Eggnog Latte, Holiday

Treats - Cranberry Bliss

Bar, Frosted Snowman Cookie,


Pop, Christmas Blend

Holiday Drinks - Gingerbread

Latte, Caramel Brulee Latte, Peppermint

Mocha, Eggnog Latte, Holiday

Treats - Cranberry Bliss

Bar, Frosted Snowman Cookie,


Pop, Christmas Blend

19

Lunch day part food promotions

2013 marks the largest increase in menu items in the last 5 years, many of which were food

items focused on the lunch day part

HEDGEYE 41



2Q14 3Q14 4Q14 1Q151 1 1 1 1 1


Products YTD 2014

Starbucks Via Latte, New Oatmeal (Hearty

Blueberry Whole Grain

Oatmeal, Classic Whole-

Grain Oatmeal),

Guatemala Casi Cielo,

Chocolate Chai Tea Latte

Bring in morning's

receipt after 2 p.m. & get any bakery treat for $1, Chocolate

Chai Tea Latte, Oatmeal (Hearty

Blueberry Whole Grain

Oatmeal, Classic Whole-Grain Oatmeal),

Gold Coast Blend Coffee

Starbucks VIA® Vanilla Latte

and VIA® Caffè Mocha, Protein

Bistro Box, Starbucks

Tribute Blend, Vanilla

Macchiato, Vegetable &

Fontiago Breakfast

Sandwich, Slow Roasted Ham & Swiss

Breakfast Sandwich, Egg

& Cheddar Breakfast

Sandwich, Dark Cherry & Spice Tribute

Blend

Vanilla Macchiato, Vegetable &

Fontiago Breakfast

Sandwich, Slow Roasted Ham & Swiss Breakfast Sandwich, Egg

& Cheddar Breakfast Sandwich, Colombia

Nariño coffee, Starbucks®

Brezza Blend, Oprah Chai

Tea

Frappuccino, Oprah Chai Tea,

Starbucks® Brezza Blend, Teavana Tea

Frappuccino, Oprah Chai Tea,

Starbucks® Kati Kati Blend, Teavana Shaken

Iced Tea (Passion

Tango, Green Tea, Peach Green Tea Lemonade Blackberry

Mojito, & Black Tea)

Oprah Chai Tea, Starbucks®

Kati Kati Blend, Teavana Shaken

Iced Tea (Passion Tango,

Green Tea, Peach Green

Tea Lemonade Blackberry

Mojito, & Black Tea) - $2 with that morning's receipt after 2

PM

Oprah Chai Tea, Starbucks®

Kati Kati Blend, Teavana Shaken

Iced Tea (Passion Tango,

Green Tea, Peach Green

Tea Lemonade Blackberry

Mojito, & Black Tea) - $2 with that morning's receipt after 2

PM

Anniversary Blend, Pumpkin

Spice Latte, Salted Caramel

Mocha, Teavana®

Oprah Chai Tea Latte, Pumpkin

Scone, Pumpkin

Cream Cheese Muffin,

Washington Apple Pound

Cake, Bring in your morning receipt after 2pm and get

any bakery treat for $1

Pumpkin Spice Latte, Salted

Caramel Mocha, Oprah Chai Tea

Latte, Starbucks Rewards

Holiday Drinks (Chestnut

Praline Latte, Peppermint

Mocha, Caramel Brulée Latte,

Eggnog Latte, Gingerbread

Latte), Holiday Treats

(Peppermint Brownie Cake Pop, Frosted

Snowman Cookie,

Cranberry Bliss® Bar),

Holiday Turkey & Stuffing

Panini, Thanksgiving

Blend, Christmas

Blend, Verismo 580 Brewer - $59 (with free box of pods

online through 12/1)

Holiday Drinks (Chestnut

Praline Latte, Peppermint

Mocha, Caramel Brulée Latte,

Eggnog Latte, Gingerbread

Latte), Holiday Treats

(Peppermint Brownie Cake Pop, Frosted

Snowman Cookie,

Cranberry Bliss® Bar), Guatemala Casi Cielo

Coffee

23

Food promotion, aimed at growing the afternoon day part

HEDGEYE 42



2Q15 3Q15 4Q15 1Q161 1 1 1 1


Products YTD 2015

Flat White Espresso,

Guatemala Casi Cielo Coffee

Tiramisu Latte, Caramel

Flan Latte, Espresso

Roast, Brazil Nova Resende,

Double-Smoked Bacon,

Cheddar & Egg Breakfast

Frappuccino® Happy Hour

(50% off from 2 - 5 pm on 3/30),

Starbucks Tribute Blend,

PERÚ AMAZONAS Small Lot

Coffee

Reduced-Fat Turkey Bacon

Sandwich, Spinach Feta

Wrap, Iced drinks (Iced

Caffè Latte, Iced Caffè Mocha, Iced coffee)

Half off any Frappuccino

blended beverage 5/1-5/10 3pm to 5 pm (featuring

Caramel Ribbon Crunch & S'mores),

Kona Parry Estate coffee

Savory Foldovers (Ham and Cheese, Wheat

Spinach or Pepperoni &

Tomato), VIA® Instant iced

coffee

Treat Receipt (Bring in that

morning's receipt after 2 PM & get any Grande Iced

Drink for $2.50), Teavana

Mango Black Tea

Lemonade, Small Batch Cold Brew

Coffee

Frappuccino® blended crème

beverages (Strawberry Shortcake & Blackberries and Crème), Uganda Sipi Falls Coffee

Pumpkin Spice Latte, Pumpkin Cookie, Chai

Tea Latte, Toasted

Graham Latte, PB&J Bistro

Box

Pumpkin Spice Latte, Pumpkin Cookie, Chai

Tea Latte, Toasted

Graham Latte, PB&J Bistro

Box, Starbucks Reserve® Panama

Carmen Estate coffee

Holiday Spice Flat White,

Buy One Holiday Drink & Get One Free to

Share 11/12-11/15 2 pm - 5

pm

Holiday Spice Flat White,

Gingerbread Tea Latte

25

Promoting breakfast sandwiches, wraps, fold overs, and bistro boxes, overwhelmingly

focused on growing the afternoon daypart

HEDGEYE 43

2016 TO DATE PROMOTIONAL CALENDAR

DATA SOURCE: RESTAURANT RESEARCH, STARBUCKS MOBILE APP, HEDGEYE.

2Q16

Jan-16 Feb-16

Latte Macchiato vs.

Flat White, Teavana

London Fog Tea Latte,

Italian-Style Ham & Spicy

Salami

Latte Macchiato vs. Flat White,

Spicy Chorizo, Monterey Jack

& Egg Breakfast

Sandwich, Molten

Chocolate Latte, Bring in your morning

receipt any time after 11am and get a Panini,

Deli Sandwich, Bistro Box or Salad for $4 (through 3/6)

Is the afternoon food daypart slowing? In all of calendar 2015 Starbucks did not have a promotion like this to drive the afternoon daypart, but in February 2016 (2Q16), they chose to do so.

New Food Items in Fiscal Year 2Q16Spicy Chorizo Breakfast Sandwich

Nutritional Stats (172g)

•Calories: 500

•Total Fat: 30g

•Sodium: 860mg

•Carbs: 35g

•Protein 26g

Price: $5.05 w/tax

Ancho-Chipotle Chicken PaniniNutritional Stats (168g)

•Calories: 440

•Total Fat: 18g

•Sodium: 1020mg

•Carbs: 46g

•Protein 20g

Price: $6.86 w/tax

Capacity Constraints of Food at Starbucks• Most Starbucks locations are equipped with one or two Turbo Chef ovens to cook their hot food

items in

• SBUX faces a major capacity constraint as each oven can only cook one item at a time, with a panini taking about 1 minute 25 seconds and a breakfast sandwich taking about 1 minute 10 seconds, it makes it difficult to fulfill multiple orders in a timely manner

• If for instance 10 people in a row in line order a sandwich, the 10th person is likely to wait 5-10 minutes for their order to be filled, not exactly speed and convenience

HEDGEYE 44

SBUX’S FOOD IS NO HEALTHIER THAN ANYONE ELSE'S

DATA SOURCE: COMPANY WEBSITES, COMPANY MOBILE APPS, RESTAURANT RESEARCH, HEDGEYE, CONNECTICUT STATE TAX USED FOR PRICING.

Starbucks McDonald’s Dunkin Donuts Panera

Nutritional Stats

• Calories: 500

• Total Fat: 28g

• Sodium: 920mg

• Carbs: 41g

• Protein 15g

Price: $3.67 w/tax

Sausage & Cheddar Breakfast Sandwich

Nutritional Stats

• Calories: 550

• Total Fat: 29g

• Sodium: 1050mg

• Carbs: 44g

• Protein 20g

Price: $4.29 w/tax

Sausage, Egg & Cheese on Ciabatta

Nutritional Stats

• Calories: 470

• Total Fat: 30g

• Sodium: 830mg

• Carbs: 29g

• Protein 21g

Price: $3.71 w/tax

Sausage McMuffin with Egg

Nutritional Stats

• Calories: 450

• Total Fat: 26g

• Sodium: 970mg

• Carbs: 33g

• Protein 20g

Price: $3.71 w/tax

Sausage Egg and Cheese on English Muffin

Nutritional Stats

• Calories: 440

• Total Fat: 18g

• Sodium: 1020mg

• Carbs: 46g

• Protein 20g

Price: $6.86 w/tax

Ancho Chipotle Chicken

Nutritional Stats

• Calories: 740

• Total Fat: 24g

• Sodium: 2150mg

• Carbs: 86g

• Protein 46g

Price: $8.50 w/tax

Sausage, Egg & Cheese on Ciabatta

Nutritional Stats

• Calories: 360

• Total Fat: 6g

• Sodium: 960mg

• Carbs: 43g

• Protein 33g

Price: $5.44 w/tax

Artisan Grilled Chicken Sandwich

Nutritional Stats

• Calories: 730

• Total Fat: 41g

• Sodium: 1320mg

• Carbs: 58g

• Protein 31g

Price: $4.24 w/tax

Chicken Bacon Sandwich

Bre

ak

fast

Lu

nch

Co

mm

en

tary

•Day part mix: 25% Breakfast, 37% lunch, 30% Dinner, 8% Late Night

• It is notable that although similar price, the MCD egg sandwich uses a freshly cracked and cooked egg unlike SBUX’s, which has a laundry list of ingredients in its “eggs”

•Day part mix: 20% Breakfast, 40% lunch, 40% Dinner

•Fresh cracked egg

•Panera comes with a premium price tag due to their premium ingredients and fast casual atmosphere

•Day part mix: 50% Breakfast, 25% lunch, 15% Dinner, 10% Late Night

• Ingredients of egg similar to SBUX’s

• Day part mix: 50% Breakfast, 20% lunch, 15% Dinner, 15% Late Night

• Egg ingredients: whole eggs, whey, skim milk, soybean oil, modified food starch, contains less than 2% of the following: dicalcium phosphate, salt, sodium bicarbonate, butter flavor [sunflower oil, natural flavors, medium chain triglycerides and palm kernel oil], xanthan gum, guar gum, liquid pepper extract, citric acid

HEDGEYE 45

“TEA IS A DRINK THAT BETTER ATTACHES WITH FOOD…”

DATA SOURCE: RESTAURANT RESEARCH, COMPANY FILINGS, HEDGEYE.

Starbucks Calendar Year Menu TrendsTotal Hot ColdMenu Lunch/ Baked Specialty Specialty Hot Iced Items Sandwiches Breakfast Goods Beverages Beverages Coffee Coffee Tea Other

2015 165 19 14 35 20 45 6 4 22 02014 170 13 15 31 24 44 5 5 30 3

YoY Growth ‐2.9% 46.2% ‐6.7% 12.9% ‐16.7% 2.3% 20.0% ‐20.0% ‐26.7% ‐100.0%

Scott Maw, SBUX CFO at Goldman Sachs Global Retailing Conference on 9/10/15:“Tea is a drink that better attaches food, and so I think our up-leveled sandwich offering, some of the things we’ve done even with afternoon snacks, better goes with tea.”

IF THIS IS TRUE, WHY DID TEA MENU ITEMS DECREASE -26.7% YOY?• Additionally, they are making an effort to decrease their beverage count (a core competency) while simultaneously increases

their food offerings, a relatively weak segment for them compared to their quick service competition. This is especially concerning given the design of their restaurant and the ability to efficiently deliver these food items to the customer effectively.

• Food made up 19% of sales in 2015 at company operated stores, and yet it made up 41.7% of menu items in CY15, up from 34.7% the previous year.

HEDGEYE 46

BISTRO BOXES DRIVING FOOD SALESBISTRO BOXES ALIGN WITH CORE STARBUCKS CONSUMER

DATA SOURCE: COMPANY WEBSITE, HEDGEYE RESEARCH.

Bistro Boxes Driving the Food CompBistro Box - Edamame Hummus Wrap


•Calories: 460

•Total Fat: 25g

•Sodium: 810mg

•Carbs: 47g

•Protein 7g

Price: $6.33 w/tax

Bistro Box – Southwest Steak Wrap


•Calories: 450

•Total Fat: 19g

•Sodium: 830mg

•Carbs: 52g

•Protein 13g

Price: $6.86 w/tax

Bistro Box – PB&J on Wheat


•Calories: 450

•Total Fat: 23g

•Sodium: 560mg

•Carbs: 48g

•Protein 14g

Price: $5.58 w/tax

• In 1Q16 Bistro Boxes were up 65%, while breakfast sandwiches were up roughly 40%, Bistro Boxes are driving the majority of the food comp (3% in 1Q16). Leading us to think that as they continue to add unhealthy items to the menu they will not see the same success overall.

— Kevin Johnson, SBUX COO during 1Q16 CC, “I think we certainly have dialed in in the morning daypart and what we’ve done to complement the food items with breakfast sandwiches, I think for lunch and afternoon daypart the Bistro Boxes and how we are dialing in there [has been successful]”

— The way we read this is that the Bistro Boxes far and away are what is driving lunch time food purchases, not the sandwiches that they have been adding to the menu (i.e. Ancho-Chipotle Chicken Panini).

• For instance their BBQ Beef Brisket sandwich which is still carried in some locations, has been discontinued at most as of January 1st and was replaced by the Ancho-Chipotle Chicken sandwich. From our research it is primarily southern stores that have discontinued it, most likely because SBUX knew they couldn’t compete with true southern BBQ.

• In a few slides we will take you through our survey work, which will further explain the dynamic between the Starbucks consumer and their opinion of the food at Starbucks, and why they are more focused on healthy food options.

HEDGEYE 47

SBUX FOOD SUPPLY CHAIN IS GETTING VERY COMPLEX

MULTIPLE RECALLS IN MARCH 2016 + PRODUCTS OUT OF STOCK

DATA SOURCE: COMPANY FILINGS, COMPANY MOBILE APP, HEDGEYE.

• If a restaurant wants to effectively grow its store base, or in SBUX’s case its food sales at its stores, it is imperative that they must have tight controls of their supply chain in order to ensure supply safety and availability.

• SBUX had two recalls in the month of March, they weren’t nationwide, much more localized, but it shows the challenges they have on the product coming into their store. What does it do to the brand image?

— One was a 250 location recall of egg sandwiches in TX, OK and AR.

— The other, a recall of a Cheese & Fruit Bistro Box in Washington state.

• Secondly, inventory controls also seem to be an issue. If you are going to offer a menu all day, you should be able to have all products in stock all day.

• In order for Starbucks to grow food sales from 20% of the business to 25% of the business, this is just one aspect that will need to be greatly refined.

Out of Stocks, Out of Control?

HEDGEYE 48

DRIVEN BY PRICE INCREASES

AVERAGE CHECK GROWTH• SBUX has seen an

acceleration in average check growth from 2013 to 2015

• While their coffee/Bakery competitors (Tim Horton’s, Krispy Kreme and Dunkin Donuts) saw a deceleration in growth from 2014 to 2015, led by discounting and less price taken

• Previous to 2015, the check gap between SBUX and its competition averaged $0.44 from 2010 to 2014, in 2015 the gap widened to $0.59. How long will that be sustainable?

DATA SOURCE: RESTAURANT RESEARCH, CONSENSUS METRIX, COMPANY FILINGS.

$5.56

$5.67

$5.84

$6.10

$5.10

$5.22

$5.40

$5.51

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

$4.75

$4.95

$5.15

$5.35

$5.55

$5.75

$5.95

$6.15

$6.35

2012 2013 2014 2015

Starbucks Coffee/Bakery ex. SBUX Coffee/Bakery ex. SBUX YoY Change SBUX YoY Change

HEDGEYE SURVEY SERIES

HEDGEYE 50

CIVICSCIENCE OVERVIEW

DATA SOURCE: CIVICSCIENCE.

• CivicScience is a consumer and market intelligence company. Through fun and engaging polls delivered across the web, they study millions of real consumers - not just biased, paid survey panelists - on hundreds of topics every day, like media consumption, shopping behaviors, brand preferences, technology usage, and much more. Clients and partners can add custom questions, generating scientifically-valid answers almost instantly, with the ability to cross-tabulate results against thousands of attributes in the database. The methodology has been evaluated and endorsed by leading academic, economic, and industry researchers. The company has an extensive clientele of leading brands, media outlets, and investors who subscribe to their suite of syndicated and custom products.

HEDGEYE 51

COFFEE DRINKING TRENDSQUESTION: HOW OFTEN DO YOU DRINK COFFEE?

DATA SOURCE: CIVICSCIENCE. RESULTS FILTERED BY U.S. ADULTS 18+ AND WEIGHTED BY U.S. ADULTS. RESPONSES: 116,904.

Results

Quarterly Timeview

• Not surprisingly much of the U.S. Adults ages 18 and over are coffee drinkers, with 41% of them saying they drink it “every day, without fail.”

• In the last 15 quarters coffee drinking trends have been relatively stable overall

• But in 1Q16 we saw a slight diversion from historical averages, with answers of “every day, without fail” declining 300 basis points from 45% to 42%

• While people who say “I never drink coffee” spiked by 600bps from 17% to 23%

• Although this is a one quarter trend, we will be tracking it going forward to see if it continues, and if it does it will mean problems for more than just SBUX

19%

41%

18%

13%

8%

I never drink coffee

Every day, without fail

Most days but I can live without it

Occasionally but not often

Very rarely if ever

0%

10%

20%

30%

40%

50%

I never drinkcoffee

Every day,without fail

Most days but Ican live without it

Occasionally butnot often

Very rarely ifever

HEDGEYE 52

COFFEE DRINKING TRENDS (CONT’D)QUESTION: HOW OFTEN DO YOU DRINK COFFEE?

DATA SOURCE: CIVICSCIENCE, RESULTS FILTERED BY U.S. ADULTS 18+ AND WEIGHTED BY U.S. ADULTS. RESPONSES: 116,904.

Profile > Age: How often do you drink coffee? compared with To what broad age group do you belong?

Segments

• As you can see in the chart to the left, the non-millennials ages 35 and up make up 82% of the people who said they drink coffee “every day, without fail”

• Millennials under index in the “Every day, without fail” category with only 24.6% of millennials saying they drink coffee everyday, while 41.4% of the U.S. Adult 18+ segment fell into that category

18%

5%

13%

22%

21%

10%

6%

10%

12%

13%

9%

7%

10%

11%

11%

19%

16%

18%

18%

20%

20%

22%

18%

15%

16%

13%

20%

14%

11%

10%

11%

24%

17%

11%

9%

I never drink coffee

Every day, without fail

Most days but I can live without it

Occasionally but not often

Very rarely if ever

18-24 25-29 30-34 35-44 45-54 55-64 65 or older

20.9%

19.7%

19.4%

19.1%

23.9%

9.0%

7.7%

8.2%

8.6%

12.4%

13.7%

13.0%

12.8%

12.6%

19.2%

17.7%

18.0%

18.2%

18.3%

19.9%

38.7%

41.6%

41.4%

41.4%

24.6%

U.S. Census

U.S. Women 18+

U.S. Adults 18+

U.S. Men 18+

U.S. Millennials (18-34)

I never drink coffee Very rarely if ever Occasionally but not often Most days but I can live without it Every day, without fail

HEDGEYE 53

MILLENNIALS GRAVITATING AWAY FROM COFFEE

COFFEE DRINKING TRENDS (CONT’D)• In total coffee drinking

trends have been relatively stable over the last 15 quarters, we went one step further to see if there were any differences with age and gender

• U.S. millennials ages 18-34 stood out the most as having the biggest change in opinion

• As you can see in the chart, ‘very rarely + occasionally’ has climbed from 27.8% to 32.9% and ‘I never drink coffee has climbed from 21.5% to 24.4% in this four year snapshot

• While, ‘Every day’ has recovered in the last year to 25.2%, up from 23.1%, it is still well off of its four year high in 2013 of 29.1%

DATA SOURCE: CIVICSCIENCE. AVERAGE RESPONSES PER YEAR: 2,904.

21.5% 21.3%

24.4% 24.4% 27.4%

29.1%

23.1%

25.2% 23.3%

20.0% 19.8%

17.4%

27.8%

29.6%

32.7% 32.9%

15%

17%

19%

21%

23%

25%

27%

29%

31%

33%

35%

U.S. Millennials (18-34) 2012 U.S. Millennials (18-34) 2013 U.S. Millennials (18-34) 2014 U.S. Millennials (18-34) 2015

% I never drink coffee % Every day, without fail

% Most days but I can live without it % Combined very rarely + occasionally

HEDGEYE 54

BROADER ADULT CATEGORY SEEING SLIGHT DECELERATION IN ‘EVERY DAY, WITHOUT FAIL’

COFFEE DRINKING TRENDS (CONT’D)

• Although not as distinct as the millennial trends on the previous page, Adults 18+ say they are drinking less coffee

• Option “every day, without fail” is down -330bps in 2015 to 40.3%, from its four year high in 2013 of 43.6%

• While every day drinkers have declined, Adults that never drink coffee has increased +220bps from its low of 18.2% in 2013 to 20.4% in 2015

DATA SOURCE: CIVICSCIENCE. AVERAGE RESPONSES PER YEAR: 28,656.

18.7% 18.2% 19.7% 20.4%

43.0% 43.6%

40.5% 40.3%

19.0% 18.0% 18.2% 17.5%

19.2% 20.1%

21.6% 21.8%

15%

20%

25%

30%

35%

40%

45%

50%

U.S. Adults 18+ 2012 U.S. Adults 18+ 2013 U.S. Adults 18+ 2014 U.S. Adults 18+ 2015

% I never drink coffee % Every day, without fail

% Most days but I can live without it % Combined very rarely + occasionally

HEDGEYE 55

OPINION OF STARBUCKSQUESTION: HOW MUCH DO YOU LIKE TO DRINK STARBUCKS COFFEE?


Results

Quarterly Timeview

• From our survey and personal experience, Starbucks coffee has a more polarizing taste profile than other coffee retailers

• For instance we asked the same question about Dunkin’ Donuts and their ‘I Don’t really have a strong opinion’ was 41% of the vote, 14 points above Starbucks

• You can see this trend of polarization becoming more pronounced over time

• Answers for ‘I don’t like it’ have increased 500bps since 3Q14,

• Answers for ‘I love it’ have decreased 600bps since 2Q14

• As competition continues to intensify the casual consumer may start drifting further away from Starbucks

1%

12%

23%

27%

37%

Never heard of it

I love it

I like it

I don’t really have a strong opinion

I don’t like it

15%

9%

34%39%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

Never heard of it

I love it

I like it

I don't really havea strong opinion

I don't like it

HEDGEYE 56

OPINION OF STARBUCKS (CONT’D)QUESTION: HOW MUCH DO YOU LIKE TO DRINK STARBUCKS COFFEE?


Profile > Age: How much do you like to drink Starbucks coffee? compared with To what broad age group do you belong to?

Segments

• Notably, the older generation, 45 YOA and up represent 57% of the “I don’t like it” category

• Millennials for one are more likely to have an opinion either way on liking it or not, millennials saying “I don’t like it” easily beat out those who said “I love it” 30.2% to 17.6%

17%

21%

14%

11%

9%

10%

13%

10%

8%

8%

10%

10%

10%

7%

8%

19%

19%

19%

15%

18%

17%

17%

19%

19%

20%

11%

11%

14%

17%

17%

16%

9%

14%

23%

20%

Never heard of it

I love it

I like it

I don’t really have a strong opinion

I don’t like it

18-24 25-29 30-34 35-44 45-54 55-64 65 or older

35.3%

34.3%

36.7%

39.1%

30.2%

26.9%

25.9%

27.0%

28.3%

24.1%

22.6%

23.3%

22.7%

22.0%

26.2%

13.4%

15.3%

12.1%

8.7%

17.6%

U.S. Census

U.S. Women 18+

U.S. Adults 18+

U.S. Men 18+

U.S. Millennials (18-34)

Never heard of it I don’t like it I don’t really have a strong opinion I like it I love it

HEDGEYE 57

MILLENNIAL INTEREST IN STARBUCKS COFFEE IS SLIPPING

OPINION OF STARBUCKS (CONT’D)• As millennials have shown

they are shifting away from coffee, we are also seeing them shift away from Starbucks

• Millennials saying “I don’t like it” are off their 2013 highs, but up sequentially from 2014 from 29.6% to 32.1%

• Millennials saying “I like it” are down 210bps from 2013 highs of 27.8% to 2015 levels of 25.7%

• As millennials become a larger part of the workforce, their opinion of Starbucks will matter more to the brand, the current trends do not bode well for Starbucks


18.4%

19.9%

18.5%

17.3%

26.3%

27.8% 27.6%

25.7%

25.3%

18.4%

24.3% 24.9%

30.0%

33.9%

29.6%

32.1%

15%

17%

19%

21%

23%

25%

27%

29%

31%

33%

35%

Millennials (18-34) 2012 Millennials (18-34) 2013 Millennials (18-34) 2014 Millennials (18-34) 2015

Starbucks coffee > % I love it Starbucks coffee > % I like it

Starbucks coffee > % I don't really have a strong opinion Starbucks coffee > % I don't like it

Average Sample size per year = 1,800

HEDGEYE 58

QUESTION: HOW DO YOU FEEL ABOUT THE QUALITY OF THE FOOD ITEMS AT STARBUCKS (NOT INCLUDING COFFEE AND OTHER DRINKS)?

FOOD SURVEY RESULTS

• We asked ~2,400 people this question, and the results shook out how we expected…

• Many of Starbucks’ customers are not buying their food, and although this presents a large opportunity for them, we believe it shines a light on a weakness

• Roughly half of the regular Starbucks customers are not interested in Starbucks’ food as they only purchase beverages

4%

12%

3%

21%

60%

It's better than it was a year ago.

It's the same as it was a year ago.

It's worse than it was a year ago.

I don't know. I go to Starbucks but I never eat the food there.

I don't know. I never go to Starbucks.

Sample size = 2,356

DATA SOURCE: CIVICSCIENCE, RESULTS FILTERED BY U.S. ADULTS 18+ AND WEIGHTED BY U.S. ADULTS.

HEDGEYE 59

QUESTION: HOW DO YOU FEEL ABOUT THE QUALITY OF THE FOOD ITEMS AT STARBUCKS (NOT INCLUDING COFFEE AND OTHER DRINKS)?COMPARED WITH DO YOU REGULARLY DO AEROBIC / CARDIO ACTIVITIES WHEN EXERCISING?

FOOD SURVEY RESULTS (CONT’D)

• What really stood out is that it appears Starbucks is NOT converting its healthiest customers into diners, note the chart to the left

• The healthier respondents are much more likely to be drinks-only customers, this seems to be misaligned with the way Starbucks has positioned their menu, towards more food items in an effort to expand that segment for them


45%

57%

34%

55%

43%

66%

Food Customers (13%)

Drinks-only Customers (17%)

Non-Customers (70%)

*Weighted according to U.S. Census figures for gender and age 18 and older

Do you regularly do aerobic / cardio activities when exercising?

Yes No

Responses: 534

HEDGEYE 60

OF IDENTIFIED STARBUCKS CONSUMERS



51.9%

54.2%

53.4%

54.8%

6.2%

6.8%

6.0%

8.1%

30.8%

30.0%

30.7%

28.9%

11.1%

9.1%

9.9%

8.1%

U.S. Millennials (18-34) (N=340)

U.S. Adults 18+ (N=935)

U.S. Women 18+ (N=526)

U.S. Men 18+ (N=409)

% I don't know. I go to Starbucks but I never eat the food there. % It's worse than it was a year ago

% It's the same as it was a year ago % It's better than it was a year ago

• Millennials, the group that eats the most food at Starbucks, in fact thinks the food is better than it was a year ago

• It is most likely the Millennial women thinking the food is better, given that 9.9% of adult women thought the food has improved in the last year, versus just 8.1% for adult men

• Loss of millennials poses the biggest risk to Starbucks given the deterioration Starbucks is seeing in that demographic (see slide 57)

HEDGEYE 61

WOMEN THINK ITS BETTER, BUT THEY DON’T EAT THE MOST AT STARBUCKS


Responses: 2,356

DATA SOURCE: CIVICSCIENCE, RESULTS FILTERED BY U.S. ADULTS 18+ AND WEIGHTED BY U.S. ADULTS.

• Ah the proof! Overwhelming (61%) of the respondents saying the food is better than a year ago were female

• Unfortunately for Starbucks, although women dominate the category of thinking the food is better, they are also the majority when it comes to Starbucks customers that never eat the food, 56% versus 44% male

• Our guess is that these women are opting for the bistro boxes and parfaits not the Ancho- Chipotle Chicken Panini

39%

42%

51%

44%

52%

61%

58%

49%

56%

48%

It's better than it was a year ago (4%)

It's the same as it was a year ago (12%)

It's worse than it was a year ago (3%)

I don't know. I go to Starbucks but I never eat thefood there (21%)

I don't know. I never go to Starbucks (60%)

Male Female

LOYALTY PROGRAM AND MOBILE ORDER & PAY

HEDGEYE 63

WHY CHANGE THE MOST SUCCESSFUL LOYALTY PROGRAM

LOYALTY

• On February 22, 2016, SBUX held a conference call to run through the upcoming changes to their successful loyalty program

• The changes come at an interesting time, given they have one of the most successful loyalty programs in the restaurant industry

DATA SOURCE: COMPANY FILINGS, HEDGEYE ESTIMATES.

Loyalty Quick Stats• SBUX currently has over 11 million active loyalty

members• Members spend 3x what non-members spend

Loyalty Math

New Rewards Debit Card

• Management described the changes in the loyalty program as the most requested thing by members

• They went on to say that it would negatively affect a small minority of members

• If you run the math a person that orders a grandebrewed coffee ($2.25) would now need to visit SBUX more than twice as much (28 times to be exact) to get the same reward as under the previous program, which was rewarded after 12 visits

• The real question is, how desperate are people for Starbucks rewards, will the lure of more stars, and the possibility of spending them on other companies such as Lyft and Spotify drive people to buy the food?

• During the recent analyst day, SBUX management also announced a new pre-paid debit rewards card, which seems counter intuitive to their push towards mobile order & pay

HEDGEYE 64

STRONG TAILWIND FOR THE COMPANY

MOBILE ORDER & PAY (MOP)

• Launched Mobile Order & Pay nationally to company-operated stores in September 2015

• Customer Issues:

• Using rewards on the app

• Finding and switching locations when ordering

• Overall, the app has positive reviews from users and employees alike

DATA SOURCE: COMPANY FILINGS, COMPANY MOBILE APP.

• In 1Q16 21% of total U.S. transactions were paid using the mobile apps, with December accelerating to 22%

• Over 1 million customers in the U.S. used MOP in December, and each of those customers averaged approximately five mobile orders in the month

• SBUX is processing 6 million MOP transactions per month

• As this initiatives gets older, the rate at which it continues to grow will be vital to the story

COMMODITIES

HEDGEYE 66

COFFEE

• Commodities have been a major tailwind for SBUX

• When these start to turn against them, record high margins will begin to contract


HEDGEYE 67

CURRENTLY AT A 5 YEAR LOW

MILK

• The deflationary milk prices have been a strong tailwind for Starbucks

• The current prices are at 5 year lows

• There is not way to predict when exactly milk prices will rise again, but when they do this will turn into a headwind for profitability


MARGIN ANALYSIS

HEDGEYE 69

HOW LOW CAN IT GO?

SBUX COST OF SALES• Cost of sales as a percent

of sales was down -78bps in 1Q16, and is down -166bps over the last two years

• COGS as a percent of sales has been in decline since 4Q12, averaging a -95bps decline per quarter YoY

• Going forward consensus estimates are projecting continued declines, albeit it, at a more modest pace, of -50bps in 2Q16

• How low can it go? They do have a deflationary commodity market on their side, but this has to level out


285

183

127

-24

-89-114 -107

-32 -31

-98

-150-183

-88

-131 -117-88 -78

-50 -58 -70 -65

43

.5% 44

.2%

43

.8%

43

.4%

42

.7%

43

.0%

42

.7%

43

.1%

42

.3%

42

.1%

41.

2%

41.

2%

41.

5%

40

.8%

40

.0%

40

.3%

40

.7%

40

.3%

39

.5%

39

.6%

40

.0%

38%

39%

40%

41%

42%

43%

44%

45%

-300

-200

-100

0

100

200

300

400

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg Cost of Sales Avg. LTM

HEDGEYE 70

SBUX STORE OPERATING EXPENSES• Store operating expenses

as a percentage of sales increased by +90bps, which was primarily driven by investments in partners

• More specifically, in the Americas region, store operating expenses increased +80bps, driven by 120bps impact of partner investments

• Management still believes despite these investments operating margins will expand for the FY2016

• Store operating expenses were also impacted by the change in ownership of Starbucks Japan


2213

-63

-23

-1

-96 -101

-145-130

0

-55 -51

-27-42

-18

30

90

43

13

-26-33

36

.5%

37

.9%

37

.3%

37

.1%

36

.4%

37

.0%

36

.3%

35

.7%

35

.1%

37

.0%

35

.8%

35

.2%

34

.9%

36

.6%

35

.6%

35

.5% 35

.8%

37

.0%

35

.7%

35

.2%

35

.4%

34%

35%

36%

37%

38%

-200

-150

-100

-50

0

50

100

150

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg Store Operating Expenses Avg. LTM

HEDGEYE 71

NO MORE ROOM TO GO DOWN

SBUX OTHER EXPENSES

• You can cut but at some point investments are needed

• The investment always occur as sales slow to help improve sales trends


6

-26-20

-9

38

-14

-40

-50

-78

-29

9

-17

-2

7

-20

-6

3

-2 -1-6 -7

3.1

%

3.3

%

3.2

% 3.3

%

3.5

%

3.2

%

2.8

%

2.8

%

2.7

%

2.9

%

2.9

%

2.7

%

2.7

%

2.9

%

2.7

%

2.6

% 2.7

%

2.9

%

2.7

%

2.5

% 2.7

%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

-100

-80

-60

-40

-20

0

20

40

60

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg Other Expenses Avg. LTM

HEDGEYE 72

SBUX GENERAL & ADMINISTRATIVE

• G&A as a percentage of sales was down -29bps in 1Q16, driven by some G&A expenses related to the Japan acquisition


26

100

5060

53

1

65

-10

-85

-27-18

-31

72

48

-59

51

-29-20

-31

-65

-11

5.6

%

6.5

%

6.0

%

6.1

%

6.1

%

6.5

% 6.7

%

6.0

%

5.3

%

6.2

%

6.5

%

5.7

%

6.0

%

6.7

%

5.9

%

6.2

%

5.7

%

6.5

%

5.6

%

5.5

%

5.6

%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

-100

-50

0

50

100

150

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg G&A Avg. LTM

HEDGEYE 73

SBUX OPERATING MARGIN

• Operating margin expansion in 1Q16 was driven by sales leverage and favorability in cost of goods, but partially offset by investments management made in the partners and digital platforms

• Will the digital investment drive further leverage?


-151

-79

49

103

42

183

156

218

259

133

206

288

27

67

96

-54

46 56

125

165

119

16.2

%

13.5

%

14.9

% 15.5

%

16.6

%

15.3

%

16.4

%

17.6

%

19.2

%

16.6

%

18.5

%

20

.5%

19.5

%

17.3

%

19.5

%

20

.0%

19.9

%

17.9

%

20

.7% 21.

6%

21.

1%

13%

15%

17%

19%

21%

23%

-200

-150

-100

-50

0

50

100

150

200

250

300

350

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg Operating Margins Avg. LTM

HEDGEYE 74

REGIONAL OPERATING MARGINAMERICAS AND EMEA DRIVING MARGIN GROWTH

DATA SOURCE: COMPANY FILINGS, CONSENSUS METRIX

Americas CAP

EMEA CPG

15%

17%

19%

21%

23%

25%

27%

29%

-150-100-50

050

100150

200250300350

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg Americas Operating Margin Avg. LTM

-5%

0%

5%

10%

15%

20%

-800-600-400-200

0200400600800

100012001400

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg EMEA Operating Margin Avg. LTM

15%

20%

25%

30%

35%

40%

-1500

-1000

-500

0

500

1000

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg CAP Operating Margin Avg. LTM

15%

20%

25%

30%

35%

40%

45%

-1500

-1000

-500

0

500

1000

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

2Q

15

3Q

15

4Q

15

1Q16

2Q

16E

3Q

16E

4Q

16E

1Q17

E

YoY BPS Chg CPG Operating Margin Avg. LTM

VALUATION

HEDGEYE 76

1 YEAR EPS REVISIONS VS. STOCK PRICE

• Estimates for the full FY16 have held steady since the release of 1Q16


Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar1.50

1.55

1.60

1.65

1.70

1.75

1.80

1.85

1.90

1.95

2.00

46

48

50

52

54

56

58

60

62

64

66

60.25

1.89

Starbucks Corporation - EPS - FY1 Starbucks Corporation - Price

HEDGEYE 77

SHORT INTEREST


ALTHOUGH LOW, SHORT INTEREST HAS BEEN STAIR STEPPING UPWARDS CONSISTENTLY

HEDGEYE 78

SELL-SIDE SENTIMENT = FIRMLY BULLISH


81% 81% 81% 85% 85%81% 81% 85% 83%

88%81% 80% 78% 77% 77% 79% 83% 86% 86% 86% 82% 83% 82% 86% 82%

19% 19% 19% 15% 15%19% 19% 15% 17%

12%19% 20% 22% 23% 23% 21% 17% 14% 14% 14% 18% 17% 18% 14% 18%

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

$0

$10

$20

$30

$40

$50

$60

$70

$80

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Buy+Overweight Hold Sell+Underweight Target Price Actual Price

HEDGEYE 79

COMPANY DASHBOARD

DATA SOURCE: FACTSET, CONSENSUS METRIX, COMPANY FILINGS, HEDGEYE RISK MANAGEMENT.

Starbucks Corporation 60.25$ EARNINGS AND VALUATION SUMMARY SUMMARY FINANCIALS VALUATION

(FY ends Dec.) NTM 2016E 2017E 2018E (Consensus in mm) NTM FY2016E FY2017E Stock Price 60.25$ Hedgeye EPS $2.02 $1.87 $2.15 $2.43 Sales $22,499 $21,523 $23,427 Shares Outstanding 1485.6% Chg YoY 18.4% 15.0% 13.0% % Chg YoY 12.3% 8.8% Market Cap 89,507.4$ Consensus $1.99 $1.89 $2.19 $2.52 EBITDA $5,619 $5,278 $5,943 + Net Debt (32.2)$ % Chg YoY 19.8% 15.6% 15.1% % Chg YoY 16.6% 12.6% + Preferred Equity ‐$ Variance % ‐1.2% ‐1.7% ‐3.5% EBITDA Margin* 25.0% 24.5% 25.4% + Minority Interest 1.9$

P/E 28.8X 31.2X 27.0X 23.8X EV/EBITDA 15.9X 17.0X 15.1X Enterprise Value 89,477.1$

INVESTMENT POSITIVES INVESTMENT NEGATIVES NTM EBITDA 5,618.7$ 1) Category leading brand 1) Losing focus on core product line NTM EV/EBITDA 15.9x2) Tech Innovation remains strong 2) Competition NTM EPS 2.04$

3) Valuation NTM P/E 29.5x 1X Turn 3.78$ Upside/Downside 6.3%

*Consensus EBITDA MarginSource: Factset, Company Filings

©HEDGEYE RISK MANAGEMENT

HEDGEYE 80

PUBLIC COMPANY COMPARABLESCOMP SET = MCD, YUM, CMG, PNRA, WEN, DNKN, KKD, DPZ, SONC, PLKI, QSR.

DATA SOURCE: FACTSET, HEDGEYE RISK MANAGEMENT.

(1) (1)Diluted Equity Enterprise LTM NTM EV/ EBITDA Operating

Company Name Price Shares Out. Value Value Sales EBITDA Margin Margin

SBUX $60.25 1,486 $89,507 $89,477 $19,723 15.9x 23.5% 19.1%

MCD $127.57 907 $115,680 $132,117 $25,413 14.1x 34.8% 28.8%

YUM $81.90 420 $34,398 $37,540 $13,105 12.2x 21.2% 15.5%

CMG $465.00 31 $14,220 $13,556 $4,501 25.1x 19.9% 17.0%

PNRA $211.02 25 $5,219 $5,383 $2,682 12.8x 14.7% 9.7%

WEN $10.87 272 $2,960 $4,949 $1,870 12.7x 21.0% 13.5%

DNKN $47.87 93 $4,435 $6,556 $811 14.2x 51.9% 49.4%

KKD $15.87 63 $1,000 $961 $519 11.8x 13.2% 10.0%

DPZ $133.36 50 $6,647 $8,573 $2,217 17.3x 20.1% 18.6%

SONC $35.42 49 $1,745 $2,214 $619 11.9x 26.8% 19.2%

PLKI $53.25 22 $1,195 $1,264 $259 13.4x 33.6% 28.7%

QSR $38.94 226 $8,789 $21,626 $4,052 12.4x 41.1% 37.2%

Mean 14.4x 27.1% 22.5%

Median 12.8x 21.2% 18.6%

HEDGEYE 81

VALUATION MATRIXDOWNSIDE WILL BE DRIVEN BY MARGIN COMPRESSION

DATA SOURCE: HEDGEYE RISK MANAGEMENT.

11.5x 12.0x 12.5x 13.0x 13.5x 14.0x 14.3x 14.5x 14.8x 15.0x 15.3x 15.5x$5,381 $41.89 $43.71 $45.53 $47.35 $49.17 $50.99 $51.90 $52.81 $53.72 $54.63 $55.54 $56.45$5,435 $42.31 $44.15 $45.99 $47.82 $49.66 $51.50 $52.42 $53.34 $54.26 $55.18 $56.10 $57.02$5,490 $42.73 $44.59 $46.45 $48.30 $50.16 $52.02 $52.94 $53.87 $54.80 $55.73 $56.66 $57.59$5,545 $43.16 $45.03 $46.91 $48.79 $50.66 $52.54 $53.47 $54.41 $55.35 $56.29 $57.23 $58.16$5,600 $43.59 $45.48 $47.38 $49.27 $51.17 $53.06 $54.01 $54.96 $55.90 $56.85 $57.80 $58.74$5,656 $44.03 $45.94 $47.85 $49.77 $51.68 $53.59 $54.55 $55.51 $56.46 $57.42 $58.38 $59.33$5,713 $44.47 $46.40 $48.33 $50.26 $52.20 $54.13 $55.09 $56.06 $57.03 $57.99 $58.96 $59.92$5,770 $44.91 $46.86 $48.81 $50.77 $52.72 $54.67 $55.64 $56.62 $57.60 $58.57 $59.55 $60.52$5,827 $45.36 $47.33 $49.30 $51.27 $53.24 $55.22 $56.20 $57.19 $58.17 $59.16 $60.14 $61.13

BEAR BASE BULL

-30% -12% 1%

NTM EV/EBITDA Multiple

EB

ITD

A

HEDGEYE 82

RISK TO OUR SHORT THESIS

• Food growing to 25% of total revenue

• Margins improve further beyond expectations

• Flight to safety trade

• Commodity costs continue to decline

• Competition performs poorly

1

2

3

4

5

HEDGEYE 83

SUMMARY OF OUR THOUGHTS

TAILWINDS WEAKENING

MARGINS HITTING PEAK

FOOD WILL BE THE ACHILLES HEEL

COMPETITION NOT GOING AWAY

1

2

3

4

HEDGEYE 84

FOR MORE INFORMATION CONTACT:

[email protected]

Documents

HITTING THE SUMMIT - Hedgeyedocs.hedgeye.com/HE_SBUX_APR2016.pdf · research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research