25 June 2019 Americas/United States Equity Research Restaurants

Starbucks Corporation (SBUX) Rating OUTPERFORM Price (21-Jun-19, US$) 83.82 INITIATION Target price (US$) 92.00 52-week price range (US$) 84.69 - 48.54

Market cap(US$ m) 101,523 A Gold Star in Restaurants; Initiate Outperform Enterprise value (US$ m) 110,969 Target price is for 12 months. ■ We initiate coverage of Starbucks (SBUX) with an Outperform rating

Research Analysts and $92 target price. SBUX is one of the highest quality growth companies Lauren Silberman in restaurants, with ~8% rev growth (guide: 7-9%), modest margin expansion 212 325 2720 and repurchases supporting our ~14.5% EPS growth 4-yr CAGR (guide: [email protected] 10%+). Consistent 3-4% Americas SSS should support current valuation,

with Americas sales leverage, improved performance in China, global margin expansion and strategic optionality as drivers of upside. ■ Americas SSS As Primary Focus: An evolving digital ecosystem, beverage innovation, improved food platform, enhanced operations and pricing power support our 3-4% SSS estimate long term, including 3.7% in FY19. SBUX’s loyalty program drives nearly all of its comp growth, and conversion of its non-rewards customers could be a powerful SSS unlock. The comp drag from Frappuccinos should start to abate following an estimated 1% drag in FY18. ■ EPS Growth Story Intact: Guidance for long-term growth of 10%+ appears achievable, with opportunity for a return to beat and raises with a lower bar and margins at multi-year lows (guide 17-18%; 5-yr avg. 19%). We model ~15% EPS growth in FY19 and ~13.5% over the next few years. Greater sales leverage in Americas (~65% operating profit), better-than-expected traction in China from recent initiatives (CAP ~20% operating profit) and strategic optionality represent the greatest sources of upside. SBUX’s 3-yr $25BN capital return (FY18-FY20), leverage and G&A savings targets improve EPS visibility with more controllable factors. ■ Valuation: Our $92 target price is based on ~27x our NTM EPS in 12 months (in-line with implied premium on historical valuation relative to peers), and implies ~18x our NTM EBITDA in 12 months (current multiple ~17.5x). Key risks: competition, consumer spend, inflation.

Share price performance Financial and valuation metrics

Year 9/18A 9/19E 9/20E 9/21E EPS (CS adj.) (US$) 2.42 2.79 3.15 3.70 Prev. EPS (US$) - - - - P/E rel. (%) 193.7 174.3 171.4 160.1 Revenue (US$ m) 24,719.4 26,282.3 28,496.4 31,295.6 EBITDA (US$ m) 5,529.5 5,706.0 6,314.4 7,109.4 OCFPS (US$) 8.56 4.11 4.41 5.16 P/OCF (x) 6.6 20.4 19.0 16.3 EV/EBITDA (current) 19.6 19.0 17.2 15.3 On 21-Jun-2019 the S&P 500 INDEX closed at 2950.46 Net debt (US$ m) 502 9,446 11,647 12,322 Daily Jun22, 2018 - Jun21, 2019, 06/22/18 = US$51.24 ROIC (%) 200.04 130.17 106.93 100.58

Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 1,211.20 IC (current, US$ m) 1,678.10 2018A 0.65 0.53 0.62 0.62 BV/share (Next Qtr., US$) -5.7 Dividend (current, US$) 1.44 2019E 0.75 0.60 0.73 0.71 Net debt (Next Qtr., US$ m) 9,610.4 2020E 0.78 0.69 0.84 0.84 Net debt/tot eq (Next Qtr.,%) -139.1

Source: Company data, Refinitiv, Credit Suisse estimates

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

25 June 2019

Starbucks Corporation (SBUX) Price (21 Jun 2019): US$83.82; Rating: OUTPERFORM; Target Price: 92.00; Analyst: Lauren Silberman Income Statement 9/18A 9/19E 9/20E 9/21E Company Background Revenue (US$ m) 24,719.4 26,282.3 28,496.4 31,295.6 Starbucks is the premier roaster, marketer, and retailer of specialty EBITDA (US$ m) 5,530 5,706 6,314 7,109 coffee globally operating more than 28,000 company and licensed Depr. & amort. (1,072) (1,171) (1,271) (1,402) stores in 75 countries. EBIT (US$) 4,458 4,535 5,044 5,707 Net interest exp 21 (251) (273) (313) Blue/Grey Sky Scenario PBT (US$) 4,485 4,283 4,771 5,394 Income taxes (1,107) (847) (1,050) (1,187) Profit after tax 3,377 3,437 3,721 4,207 Net profit (US$) 3,377 3,437 3,721 4,207 Other NPAT adjustments 0 0 0 0 Cash Flow 9/18A 9/19E 9/20E 9/21E Cash flow from operations 11,938 5,068 5,211 5,871 CAPEX (1,976) (1,996) (2,000) (2,000) Free cashflow to the firm 9,961 3,073 3,211 3,871 Cash flow from investments (2,362) (1,861) (2,000) (2,000) Net share issue(/repurchase) (6,980) (10,152) (3,501) (2,476) Dividends paid (1,743) (1,805) (1,910) (2,070) Changes in Net Cash/Debt 739 (8,944) (2,200) (675) Balance Sheet (US$) 9/18A 9/19E 9/20E 9/21E Cash & cash equivalents 8,756 1,676 476 800 Account receivables 693 823 892 980 Other current assets 1,644 751 751 751 Total fixed assets 5,929 6,698 7,427 8,025 Investment securities 268 252 252 252 Total assets 24,156 17,944 17,542 18,553 Total current liabilities 5,684 5,298 5,392 5,509 Shareholder equity 1,176 (6,651) (7,968) (7,896) Total liabilities and equity 24,156 17,944 17,542 18,553 Net debt 502 9,446 11,647 12,322 Our Blue Sky Scenario (US$) 105.00 Per share 9/18A 9/19E 9/20E 9/21E Our $105 one-year valuation in a blue sky scenario is based on a No. of shares (wtd avg) 1,395 1,234 1,182 1,139 P/E multiple of ~29x our FY20 EPS, implying an EV/EBITDA of ~18x CS adj. EPS 2.42 2.79 3.15 3.70 our blue sky FY20 EBITDA. Our blue sky scenario is based on: 1) Prev. EPS (US$) Americas SSS of 5%; 2) Americas company unit growth of ~5%; and Dividend (US$) 1.32 1.48 1.63 1.84 3) Americas operating margins of ~24%. Free cash flow per share 7.14 2.49 2.72 3.40 Earnings 9/18A 9/19E 9/20E 9/21E Our Grey Sky Scenario (US$) 70.00 Sales growth (%) 10.4 6.3 8.4 9.8 EBIT growth (%) 1.0 1.7 11.2 13.2 Our $70 one-year valuation in a grey sky scenario is based on a P/E Net profit growth (%) 12.2 1.8 8.3 13.1 of ~23.5x our grey sky FY20 EPS implying an EV/EBITDA multiple EPS growth (%) 17.5 15.0 13.1 17.3 of 15x our FY20 EBITDA. Our grey sky FY20 grey sky scenario is EBITDA margin (%) 22.4 21.7 22.2 22.7 based on: 1) Americas SSS of 2%; 2) Americas unit growth of ~2%; EBIT margin (%) 18.0 17.3 17.7 18.2 and 3) Americas operating margins of ~21%. Pretax margin (%) 18.1 16.3 16.7 17.2 Net margin (%) 13.7 13.1 13.1 13.4 Share price performance Valuation 9/18A 9/19E 9/20E 9/21E EV/EBITDA (x) 19.6 19.0 17.2 15.3 P/E (x) 34.6 30.1 26.6 22.7 Returns 9/18A 9/19E 9/20E 9/21E ROIC (%) 200.0 130.2 106.9 100.6 Gearing 9/18A 9/19E 9/20E 9/21E Net debt/equity (%) 42.7 (142.0) (146.2) (156.1) Quarterly EPS Q1 Q2 Q3 Q4 2018A 0.65 0.53 0.62 0.62 2019E 0.75 0.60 0.73 0.71 2020E 0.78 0.69 0.84 0.84

On 21-Jun-2019 the S&P 500 INDEX closed at 2950.46 Daily Jun22, 2018 - Jun21, 2019, 06/22/18 = US$51.24

Source: Company data, Refinitiv, Credit Suisse estimates

Starbucks Corporation (SBUX) 2 25 June 2019

Executive Summary We initiate coverage of Starbucks (SBUX) with an Outperform rating and $92 target price. SBUX is one of the highest quality growth companies in restaurants, with ~8% rev growth (guide: 7-9%), modest margin expansion and repurchases supporting our ~14.5% EPS growth 4-yr CAGR (guide: 10%+). The Americas segment is the primary focus of the SBUX story, representing ~65% of operating income. China, as SBUX’s fastest growing and second largest market, has also generated greater focus more recently, with CAP representing ~20% of operating profit (China likely ~10%). Please refer to our views summarizing the Restaurants industry: US Restaurants Phone To Table: Digitizing Restaurants.

■ Americas As Primary Focus: The majority of sales and profits are comprised in the Americas segment, representing ~70% of revenue, ~65% of operating profit and ~60% of SBUX’s ~30K global units. The US makes up ~92% of Americas revenue (or 62% of consolidated SBUX revenue). Following Americas unit growth of 5.3% over the last five years, we expect growth to decelerate to 3.4% over the next four years, representing ~30% of consolidated SBUX unit growth (from ~40% over prior five years). ■ Americas Comp Strength to Continue: An evolving digital ecosystem, beverage innovation, improved food platform, enhanced operations and pricing power should contribute to 3-4% SSS long term. SBUX’s loyalty program drives nearly all of its US comp growth. The conversion of its non-rewards customers could be a powerful SSS unlock to increase program membership. A focus on the cold beverage platform (~50% of beverage mix) appears to be resonating with customers, with beverages representing the majority of comp contribution in recent quarters. Food continues to represent a long-term opportunity, with consistent SSS contribution of 1-2%. Operational enhancements appear to be generating improvements in the afternoon daypart, and should continue to yield benefits. Further, we believe SBUX maintains pricing power, with pricing relatively in-line or below more premium coffee peers. ■ Execution Against Growth At Scale: Guidance for long-term growth of 10%+ appears achievable, with opportunity for a return to beat and raises with a lower bar and margins at multi-year lows (long-term guide: 17-18%; 5-yr avg. 19%). Top-line revenue of ~9%, sales leverage, cost efficiencies and benefits from share repurchases support our expectations for EPS growth of ~14.5% over the next four years (includes ~17% growth in FY21 with 53rd week). Greater sales leverage in Americas (~65% operating profit), better-than-expected traction in China from recent initiatives (CAP ~20% operating profit) and strategic optionality represent the greatest sources of upside. SBUX’s 3-yr $25BN capital return (FY18-FY20), leverage and G&A savings targets improve EPS visibility with more controllable factors. ■ China Story Intact: Despite near-term noise from heightened competition and some deceleration in the macro environment, we remain optimistic of the long-term opportunity in China. Starbucks has consistently reiterated China will one day be the largest market in the company’s portfolio, supported by a growing coffee culture, increasing middle class and strong brand affinity. We expect China to become a more meaningful contribution to overall growth as the region outpaces growth relative to the existing portfolio. Current targets include net unit growth in the mid-teens, comprising ~80% of revenue contribution, and SSS of 1-3%. We believe recent initiatives around delivery, modified loyalty program and the potential for mobile order and pay (currently in test) could help offset competitive headwinds. We model a net unit growth CAGR of ~15% in China through FY22, or an average of ~650 units per year, representing ~55% of CAP unit growth.

Starbucks Corporation (SBUX) 3 25 June 2019

■ Valuation: Our $92 target price is based on ~27x our NTM EPS in 12 months, implying an EV/EBITDA multiple of ~18x our NTM EPS in 12 months. Our P/E multiple is in-line with the implied P/E multiple premium relative to peers and a slight discount to SBUX’s current ~28x. Our ~18x EV/EBITDA multiple is a ~0.5x premium to SBUX’s current trading multiple and above SBUX’s five-year average EV/EBITDA multiple of ~14.5x. ■ Risks: Primary risks include: (1) heightened competition from premium coffee peers, traditional QSRs and non-traditional competitors (i.e., C-stores); (2) deceleration in global consumer spending and economic conditions; (3) inflation, with ~50% of stores company-owned, representing the majority of profit contribution.

Starbucks Corporation (SBUX) 4 25 June 2019

Key Charts

Figure 1: Digital enhancements, beverage Figure 2: China represents a meaningful growth innovation, food premiumization, improved opportunity, with a targeted 6,000 units by FY22 operations and delivery should support Americas implying a ~14% CAGR vs ~27% over the last four SSS of 3-4% long term. years.

8.0% 7,000 6,000 50% 7.0% Target 45% 6,000 6.0% 40% 5.0% 5,000 35% 4.0% 4,000 30% 3.0% 25%

2.0% 3,000 20%

China China Units Americas Americas SSS

1.0% 2,000 15% YOYGrowth % 0.0% 10% 1,000 -1.0% 5%

-2.0% - 0%

2016 2011 2012 2013 2014 2015 2017 2018

2015 2014 2016 2017 2018

2019E 2022E 2020E 2021E

2022E 2019E 2020E 2021E

Traffic Avg Ticket China Units YOY Growth %

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

We estimate MSR Figure 3: My Starbucks Rewards US SSS loyalty members 2013 2014 2015 2016 2017 2018 CS Comments contribute nearly all of My Starbucks Rewards (MSR) Members (MM) 6.3 7.9 10.0 11.9 13.2 14.9 Annual Average YOY Change in Members (MM) 1.6 2.1 1.9 1.3 1.7 US comp growth YOY % 25.7% 26.7% 18.8% 11.0% 13.1%

Non-MSR Customers 62.1 62.3 62.5 63.2 65.1 66.7 YOY Change (MM) 0.2 0.2 0.7 1.9 1.7 YOY % 0.3% 0.3% 1.1% 3.0% 2.5%

Total Starbucks Customers 68.4 70.2 72.4 75.0 78.2 81.6 YOY Change (MM) 1.8 2.3 2.6 3.2 3.4 YOY % 2.6% 3.2% 3.6% 4.3% 4.3% Based on average annual unit growth

US MSR Sales $2,078 $2,469 $3,059 $3,815 $4,472 $5,198 MSR as % of US Company Sales 23% 25% 29% 32% 36% 39% Annual Average US Non-MSR Company Sales $6,956 $7,311 $7,674 $8,107 $8,125 $8,216 Non-MSR as % of US Company Sales 77% 75% 72% 68% 65% 61% US Company Sales $9,034 $9,780 $10,733 $11,923 $12,597 $13,415 CSe based on Americas Revs

Average Annual Spend - MSR Members $332 $314 $307 $322 $340 $349 Average Annual Spend - Non-MSR Members $112 $117 $123 $128 $125 $123 MSR Member Spend vs Non-MSR Customer Spend 3.0x 2.7x 2.5x 2.5x 2.7x 2.8x Per SBUX: ~3x more visits & spend

SSS Contribution from MSR Members 1.7% 2.7% 4.0% 3.2% 3.0% Total US SSS 5.5% 7.3% 6.0% 3.3% 2.3% Implied SSS Contribution from Non-MSR Members 3.8% 4.5% 2.0% 0.1% -0.7%

Source: Company data, Credit Suisse estimates

Starbucks Corporation (SBUX) 5 25 June 2019

Figure 4: SBUX Long-Term EPS Growth Algorithm Revenue growth of 7- 16% 9%, modest margin expansion and benefits 14% from share repurchases should 12% 2-3% support long-term EPS 10%+ growth of 10%+ 10% 6-7% 1-2% 8%

6% 3-4%

4% EPS Growth EPS Growth Contribution 2%

0% SSS Unit Growth Margin Share EPS Growth Expansion Repurchases

Source: Company data, Credit Suisse estimates

Figure 5: SBUX is trading relatively in-line with its Figure 6: SBUX’s P/E has a strong historical historical average multiple. correlation with Americas SSS.

36.0x 35.0x 10% 34.0x Correlation: 0.80 9% R2: 0.63 32.0x 30.0x 8% 30.0x 7% 28.0x 25.0x 6%

26.0x 5% P/E

24.0x NTM P/E 20.0x 4% 22.0x 3% Americas SSS 15.0x 2% 20.0x 1% 18.0x 10.0x 0% 16.0x

May-14 May-15 May-16 May-17 May-18 May-19

F4Q15 F2Q13 F4Q13 F2Q14 F4Q14 F2Q15 F2Q16 F4Q16 F2Q17 F4Q17 F2Q18 F4Q18 NTM P/E 5-yr Avg +1 Std Dev -1 Std Dev NTM P/E Americas SSS

Source: FactSet, Credit Suisse estimates Source: Company data, FactSet, Credit Suisse estimates Note: (1) Reflects Starbucks fiscal quarters (fiscal year ends on Sunday closest to Sept 30); (2) NTM P/E in quarter is average P/E multiple following quarterly earnings release.

Starbucks Corporation (SBUX) 6 25 June 2019

Is 3-4% Americas SSS sustainable long- term? Credit Suisse View Yes, we expect SBUX can achieve Americas SSS of 3-4% long term, driven by beverage innovation, digital enhancements and improved operations. The company is targeting relatively even contribution from transaction, pricing and average spend growth. We are encouraged by recent momentum, with beverage driving the majority of comp growth over the last three quarters representing 3% of US comp contribution. We expect reduced headwinds from the blended category as SBUX features more premium Frappuccinos to differentiate and the category becomes a less meaningful part of the sales mix. Encouragingly, SBUX has indicated afternoon performance has improved for three quarters, with F2Q19 representing the best performance over the last three years. We model FY19 SSS of 3.7% and ~3.5% long term. Digital enhancements, beverage innovation, food premiumization, improved operations and delivery should support healthy comp growth going forward. While competitive headwinds and company-specific risks exist, we believe Starbucks has a solid plan in place to maintain mid-single-digit SSS going forward. More tempered unit growth could also help alleviate incremental pressure (model ~3.5% Americas 4-yr forward unit CAGR vs 5.3% historical 5-yr CAGR). Consensus Expectations Consensus models Americas SSS of 3.8% in 2019, with ~40bps of contribution from positive traffic and ~340bps from average check. Longer-term, sell-side expectations are for Americas SSS of ~3%, at the low end of company guidance of 3-4%, including ~50bps of positive traffic. Strength expected to continue through 2019 We model 2019 Americas SSS of 3.7%, with expectations for continued comp strength in 2H19 following 1H19’s 4%. Any pushback from the change in the loyalty program in mid- April should be offset by the benefit of lapping 3Q18’s racial bias training (~50bps drag in 3Q18) and resulting impact from negative media headlines. We also expect blended to represent less of a headwind in 2019 relative to 2018. Compares are also relatively easier in 2019, with 2018’s 2% SSS the lowest SSS reported since 2009.

Figure 7: We model ~3.5% SSS in 2H19. 3Q19 is Figure 8: Over the last several quarters, beverage lapping the year’s easiest compare with 3Q18 has contributed to the majority of comp growth, and including a ~50bps impact from the racial bias should continue to be the primary driver of growth training. going forward.

4.5% 6% 4.0% 5% 3.5% 4% 3.0% 3% 2.5% 2% 2.0%

1% US US SSS

Americas Americas SSS 1.5% 0% 1.0% -1% 0.5% -2% 0.0%

-3%

4Q18 2Q18 3Q18 1Q19 2Q19

1Q18 3Q18 4Q18 1Q19 2Q19

3Q19E 4Q19E Beverage Food Other

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Starbucks Corporation (SBUX) 7 25 June 2019

Industry-leading digital platform to support long-term gains SBUX has one of the most robust digital ecosystems in the sector, with digital relationships contributing to the majority of comp growth. We view continued growth of the My Starbucks Rewards (MSR) loyalty platform, mobile developments and increasing digital relationships as key to maintaining SSS momentum and solidifying investor confidence in SBUX’s long-term story. Increasing competition from coffee peer competitors launching digital platforms could also be an added source of pressure. My Starbucks Rewards (MSR) Loyalty Program The MSR loyalty program now has ~17MM members representing ~40% of US company- operated sales. The program has grown at a ~15%+ CAGR over the last five years, though has slowed more recently. We believe a combination of initiatives can help increase awareness and conversion onto the platform.

Figure 10: MSR members represent ~40% of Figure 9: The MSR loyalty platform has grown at a company sales, up from ~30% in 2015, reflecting 15%+ CAGR over the last five years to ~17MM active growth in the platform and higher frequency and members. spend from members.

18 50% 45% 45% 16 40% 40% 14 35% 12 30% 35% 25% 10 20% 30% 8 15% MSR Members MSRMembers (MM) 10% 25%

6 MSR as % of Company MSR % as of Company Sales 5% MSRGrowth Member % YOY

4 0% 20%

1Q15 3Q17 2Q19 1Q14 2Q14 3Q14 4Q14 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19

1Q16 3Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19

MSR Members (MM) YOY %

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Note: MSR = My Starbucks Rewards. Note: MSR = My Starbucks Rewards.

In our view, a shift to a tender agnostic system could represent a meaningful unlock for digital relationships. Customers can choose to pay through any means, reducing the friction of conversion by requiring customers to preload money. For reference, Panera was able to grow its loyalty platform to 28MM members generating 50%+ in transactions (referencing 2017 data), highlighting the potential of a tender agnostic system. Dunkin’ is currently testing tender agnostic payment. Based on conversations we have had with brands that have preloaded cards and multi-tender systems, vastly all customers appear to be forgoing the preload. As more companies invest in digital capabilities, we expect tender agnostic payment to be available across the board as companies compete for digital share in addition to physical market share. Opportunities for greater awareness of the availability and benefits of the program could help generate utilization, including in- store marketing and employee encouragement. SBUX modified its loyalty program in mid-April to incorporate different reward redemption tiers. We are concerned the new loyalty program could be a drag near-term as it: 1) dilutes the value of earned stars, and 2) increases complexity. Loyalty members generate nearly all of SBUX’s SSS. That said, we do not expect this to be a challenge long term, with commentary from SBUX suggesting limited pushback within the first few weeks of the program change.

Starbucks Corporation (SBUX) 8 25 June 2019

Figure 11: In April 2019, Starbucks transitioned to a multi-tier redemption loyalty program allowing customers to redeem for 25-400 stars (vs 125 stars previously) translating to spend of $12.50-200 (vs $62.50 previously).

Customize drink 25 ★ (espresso shot, dairy sub, syrup) Brewed hot coffee, bakery item 50 ★ or hot tea Handcrafted drink, hot breakfast 150 ★ or parfait Lunch sandwich, protein box 200 ★ or salad

Select merchandise or at-home coffee 400 ★

Source: Company data, Credit Suisse estimates

Figure 12: We assume most customers have historically redeemed higher-price items like Figure 13: Based on the spend required for handcrafted drinks or sandwiches, which now redemption, the new program dilutes the value of require spend of $75-100 (vs $62.50 previously). the stars in the more common redemption tiers.

$250 $14 14%

$200 $12 12% $200 $10 10% $150 $8 8% $100 $100 $6 6% $75 Spend Spend forReward $62.50 $4 4% Implied Discount

$50 AvgRedemption Value $25 $12.50 $2 2%

$0 $0 0% 125 Stars 25 Stars 50 Stars 150 Stars 200 Stars 400 Stars 125 Stars 25 Stars 50 Stars 150 Stars 200 Stars 400 Stars Old New Program Old New Program Program Program

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

In F3Q16 (April 2016), SBUX transitioned from a frequency-based program to a spend- based program. Traffic and MSR member growth have been down since the transition, likely in part due to the change in the program. The change disincentivized customers to split up transactions to earn rewards at a faster pace under the frequency-based program, though theoretically should have been an even “reclassification” to average check, with minimal impact to SSS. Based on commentary from the company, the change in the program contributed to average check growth less than initially expected, with reward redemptions dropping significantly as customers educated themselves on the program. About six months post the change, SBUX suggested a return to more normalized behavior, with F4Q16 spend per member accelerating. MSR members represent primarily all of US comp growth, with member spend ~3x higher than non-MSR customers given both increased frequency and spend. Opportunities for personalized marketing and suggested sell highlight the benefits of conversion, which have helped generate strong returns from SBUX’s most loyal customers. We estimate MSR members have increasingly contributed to US SSS growth over the last several years through new member conversion and increasing average spend.

Starbucks Corporation (SBUX) 9 25 June 2019

Figure 14: We estimate MSR members represent primarily all of US comp growth. 2013 2014 2015 2016 2017 2018 CS Comments

My Starbucks Rewards (MSR) Members (MM) 6.3 7.9 10.0 11.9 13.2 14.9 *Annual Average YOY Change in Members (MM) 1.6 2.1 1.9 1.3 1.7 YOY % 25.7% 26.7% 18.8% 11.0% 13.1%

Non-MSR Customers 62.1 62.3 62.5 63.2 65.1 66.7 YOY Change (MM) 0.2 0.2 0.7 1.9 1.7 YOY % 0.3% 0.3% 1.1% 3.0% 2.5%

Total Starbucks Customers 68.4 70.2 72.4 75.0 78.2 81.6 YOY Change (MM) 1.8 2.3 2.6 3.2 3.4 YOY % 2.6% 3.2% 3.6% 4.3% 4.3% *Based on average annual unit growth

US MSR Sales $2,078 $2,469 $3,059 $3,815 $4,472 $5,198 MSR as % of US Company Sales 23% 25% 29% 32% 36% 39% *Annual Average US Non-MSR Company Sales $6,956 $7,311 $7,674 $8,107 $8,125 $8,216 Non-MSR as % of US Company Sales 77% 75% 72% 68% 65% 61% US Company Sales $9,034 $9,780 $10,733 $11,923 $12,597 $13,415 *CS estimate based on Americas Revs

Average Annual Spend - MSR Members $332 $314 $307 $322 $340 $349 Average Annual Spend - Non-MSR Members $112 $117 $123 $128 $125 $123 MSR Member Spend vs Non-MSR Customer Spend 3.0x 2.7x 2.5x 2.5x 2.7x 2.8x *Per SBUX: ~3x more visits & spend

SSS Contribution from MSR Members 1.7% 2.7% 4.0% 3.2% 3.0% Total US SSS 5.5% 7.3% 6.0% 3.3% 2.3% Implied SSS Contribution from Non-MSR Members 3.8% 4.5% 2.0% 0.1% -0.7%

Source: Company data, Credit Suisse estimates

SBUX has launched initiatives to attract and build digital relationships with non-MSR customers to address decelerating contribution from customers outside of the loyalty program. Since March 2018, the brand has registered 15.3 million customers, providing for more effective and relevant communication with a larger number of customers and opportunities to convert them onto the My Starbucks Rewards loyalty platform.

Figure 15: SBUX has implemented initiatives to grow digital relationships outside of MSR, with the hope of converting these customers onto the loyalty platform.

Digital Opportunity

New Digital Relationships ~13MM

My Starbucks ~16MM ~11MM ~13MM ~14MM Rewards Members

Dec 2015 Dec 2016 Dec 2017 Dec 2018

Source: Company data, Credit Suisse estimates Note: Data as of December of each year.

Starbucks Corporation (SBUX) 10 25 June 2019

Mobile Order & Pay (MOP) and Digital Utilization Starbucks has set the bar in the industry for digital and mobile utilization (outside of the large pizza players), with mobile representing 35% of US company transactions and mobile order & pay comprising 15% of US company transactions. Mobile order & pay utilization has increased nearly ~100bps every quarter since its initial launch in 4Q15, which we believe should continue as awareness builds, especially among non-MSR customers, marketing efforts around the platform increase and customers get more accustomed to using digital across the industry. We view mobile order & pay as an enabler to attract members onto the loyalty platform.

Figure 16: ~25% of Starbucks customers are part of the MSR loyalty program,

highlighting significant opportunity for Starbucks to grow the platform and ~25% of Starbucks increase utilization. customers are MSR loyalty program ~6MM (15% of Mobile Order & Pay Members members, highlighting transactions) significant opportunity to establish meaningful ~11MM (35% Mobile Paying Members digital relationships of transactions)

~17MM (41% Starbucks Rewards Active Members of sales)

All Customers 75MM

Total Addressable Away from Home 150MM Coffee/Tea Market

US Customers

Source: Company data, Credit Suisse estimates

Figure 17: Mobile represents ~35% of transactions Figure 18: Mobile order & pay accounts for ~15% of currently, up from ~25% 2016, with significant transactions, which should continue to drive potential should SBUX open payment options. increasing mobile usage and MSR platform growth.

40% 16%

35% 14%

30% 12%

25% 10%

20% 8%

15% 6%

10% 4%

MOP MOP % as Transactions of Mobile Mobile % as of Transactions 5% 2%

0% 0%

4Q14 1Q15 2Q15 3Q15 1Q14 2Q14 3Q14 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19

2Q16 4Q16 2Q17 3Q16 1Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 1Q16 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Note: F2Q19 reflects CS estimate.

~50% of US company stores have 20%+ of transactions going through mobile order & pay at peak, giving us confidence in the utilization potential as awareness builds and customers become more accustomed to using digital channels.

Starbucks Corporation (SBUX) 11 25 June 2019

Figure 19: ~4,600 US company stores are generating Figure 20: …representing ~50% of the US company 20%+ of transactions at peak from mobile order & store base, highlighting mobile order & pay pay… potential across the system and different markets.

5,000 60% 4,500 50% 4,000 3,500 40% 3,000 2,500 30% 2,000 20% 1,500 1,000 10%

500

# Stores Stores # 20%+ MOP Transactions Peak at % Stores Stores % 20%+ MOP Transactions Peak at

0 0%

2Q16 4Q16 2Q17 1Q16 3Q16 1Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19

1Q17 4Q18 1Q16 2Q16 3Q16 4Q16 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q19 2Q19

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Note: Represents US company stores. Note: Represents % of US company stores.

Starbucks has been an early leader in the digital evolution, as it has built a strong in-house team, developed a large loyalty platform and continuously invests to advance its ecosystem with new features. Competition from coffee peers, traditional QSRs and alternative channels (i.e., convenience stores) has intensified, making it even more important for brands to differentiate. White label service providers have helped smaller coffee peers develop apps without the investments of a proprietary program, improving their competitive positions. Traditional QSR peers like McDonald’s have elevated coffee platforms, with McDonald’s offering its take on a loyalty program through its app with the McCafé platform (buy five McCafé drinks, get one free). Convenience stores are also launching apps, highlighting digital engagement is becoming table stakes, and continuous evolution is necessary. We view digital as a key attribute to drive differentiation and loyalty among customers. Requiring customers to download a specific brand app inherently implies they will return and are at least somewhat loyal to the brand. Starbucks’ industry leading digital ecosystem should help the company sustain a competitive advantage as it adds features and enhances targeted marketing. Based on our analysis of digital downloads among eight of the largest traditional coffee players, Starbucks has consistently generated the majority of digital app downloads. While smaller peers have introduced apps, Starbucks has been able to continue to gain digital download share.

Figure 21: Starbucks comprises ~60%+ of the download Figure 22: For comparison, Starbucks maintains ~60% share among key competitors, largely maintaining of the overall coffee segment market share, with its growth despite the emergence of digital competition. digital share outpacing its overall market share.

100% 100% Small Chains & Biggby 90% 90% Independents 80% Scooter's 80% Peet's Coffee & Tea 70% Coffee Bean 70% Caribou Coffee 60% & Tea Leaf 60% Peet's 50% 50% Tim Hortons 93% 88% Caribou 40% 40% 67% 65% 64% Dunkin' Donuts % Download Download % Share 62% 30% 57% Tim Hortons 30% 56% 58% 59% 50% 51% 50% 48% 20% 20% Dunkin' Coffee Segment Market Share Starbucks 10% 10% Starbucks 0% 0% 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018

Source: Sensor Tower, Credit Suisse estimates Source: Technomic, Credit Suisse estimates

Starbucks Corporation (SBUX) 12 25 June 2019

Delivery as a largely untapped opportunity Delivery represents a largely untapped opportunity for Starbucks and the coffee industry overall. Starbucks has announced plans to expand delivery to ~2,000 of its US company stores (~25%) with Uber Eats following an initial pilot test in Miami. Early feedback suggests strong performance in denser markets, and we expect the company’s initial rollout will primarily target urban markets. Starbucks is in the process of integration to ensure seamless order processing and avoid disrupting the operations with the new channel. Once integration is complete, Starbucks will offer delivery directly on its app as well as through the Uber Eats platform, which we believe is best practice in ensuring control over the customers and their data. Over time, we believe Starbucks could explore alternative options to increase capacity in select markets, similar to Star Kitchens in China, the company’s version of a ghost kitchen. Coffee is intuitively a challenging segment for delivery, as coffee is meant to be consumed at a specific temperature and beverages are difficult to transport with greater risk of spillage. Customers might be more skeptical to order coffee products, increasing the importance of operational execution. Recently, Starbucks has improved its delivery packaging, including new holders for drinks that fit in the bag and stickers to seal the top of the drink to reduce spillage. We believe delivery could be a meaningful and incremental sales driver for the US business, especially in urban markets with heightened levels of competition. The coffee segment also tends to be affected by inclement weather, and delivery could help offset some of those challenges.

Figure 24: Starbucks also puts a seal at the opening Figure 23: Starbucks has recently changed its of the drink cup to reduce spillage, as well as the delivery packaging, including a beverage carrier carrying bag to maintain the order’s integrity. *June that fits in the bag. *June 2019 Delivery in NYC 2019 Delivery in NYC

Source: Credit Suisse Source: Credit Suisse Note: Delivery order from June 2019 in NYC. Note: Delivery order from June 2019 in NYC.

Starbucks Corporation (SBUX) 13 25 June 2019

Figure 25: When Starbucks first launched delivery, Figure 26: Initially, beverages were transported in a it added a seal to the bag to ensure the integrity of traditional carrying case with the same in-store lids, the order, though did not make any other changes. though that could change over time. *March 2019 *March 2019 Delivery in NYC Delivery in NYC

Source: Credit Suisse Source: Credit Suisse Note: Delivery order from March 2019 in NYC. Note: Delivery order from March 2019 in NYC.

Beverage Innovation as a core initiative for growth Core beverage innovation is a key focus area for Starbucks, and beverages have supported the majority of comp growth in recent quarters. We expect Starbucks to focus innovation and marketing around core platforms, and particularly around cold beverages. Cold now represents 50% of beverage mix, up from 35% in 2013, and ahead of the company’s target to reach 50% mix by FY21. Starbucks’ Cold Brew platform has demonstrated success, representing ~$140MM of sales in FY16, and targeted to be 4x the size globally by FY21. Platform extensions such as Nitro Cold Brew help drive new news and opportunities for “trade up” to higher premiumization. Nitro is in more than half of all US stores, and on track to roll out to all US company stores by the end of FY19. We expect Nitro to be a more meaningful comp driver as it rolls out more broadly, contributing 1 point of SSS to stores with the platform in 2017. Nitro also lends itself to other platform extensions, as the nitrogen-based technology/equipment can be used for teas, lattes and other beverages. Starbucks introduced Blonde Espresso in early 2018, the first time the brand offered a second espresso blend. We believe this product can attract a wider range of consumers given its lighter taste. Starbucks has also increased focus on featuring plant-based alternatives and beverages, appealing to a different set of occasions and/or consumers. We believe these types of innovations are necessary to increase the breadth of the consumer base and address changing consumer needs, particularly given a backdrop of heightened competition from coffee peers and non-traditional channels.

Blended category pressuring beverage contribution Softness in Frappuccinos has dragged on afternoon performance, driven by overall category sales declines and intensified competition. Starbucks’ occasional customers (visit 1-5x per month) make up ~50% of the volume sold in the afternoon, a greater share compared to other dayparts. These less frequent customers have a lower awareness of new product introductions, core offerings and promotions. Challenges to resonate with these customers appears to be a primary driver of the afternoon slowdown, while shifting the sales mix to a lower ticket product likely remains a headwind.

Starbucks Corporation (SBUX) 14 25 June 2019

Frappuccino sales growth has decelerated from 17% in FY15 to an estimated -7.5% in FY18 or a ~1% drag on SSS. We estimate Frappuccino now represents ~11.5% of US company sales, down from 13% in FY16 and FY17. Poor 3Q18 Frappuccino performance resulted in a 2%+ drag on SSS in the quarter, a double-digit sales decline in the quarter with the highest Frappuccino sales mix. Initiatives around increased premiumization and innovation appear to be helping Starbucks as it seeks to stabilize the category amidst heightened competition and category slowdown.

Figure 27: Blended Frappuccino sales have declined over the past few years, driven by changes Figure 28: Based on our estimates, the blended in consumer demand, intensified competition and category represented a ~100bps drag to FY18 US an overall category slowdown. SSS as the sales mix declined to ~11.5% of sales.

14.5% 20% 2.5% 14.0% 15% 2.0% 13.5% 1.5% 13.0% 10% 1.0% 12.5% 5% 12.0% 0.5%

11.5% 0% 0.0% Revenue Revenue Growth YOY % 11.0% US Contribution SSS -5% -0.5%

Blended Blended Frappuccino Revenue Mix 10.5% -1.0% 10.0% -10% FY14 FY15 FY16 FY17 FY18 -1.5% % of US Company Revenue YOY % FY15 FY16 FY17 FY18

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 29: Using the Frozen Dessert segment as a proxy for the category, sales growth has meaningfully decelerated in recent years.

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0% Frozen Frozen Dessert Segment Sales Growth 0.0% 2012 2013 2014 2015 2016 2017 2018

Source: Technomic, Credit Suisse estimates

Afternoon performance has improved over the last three quarters, reflecting stronger operations and cold beverage innovation resonating with the afternoon customer. As the drag from Frappuccino declines, we expect afternoon performance will continue to improve.

Starbucks Corporation (SBUX) 15 25 June 2019

Enhanced food platform continues to grow Starbucks is targeting a Innovation, quality improvements and selective partnerships have supported a growing 25% food mix in the US food platform, which now represents 22% of US sales, with a target to achieve 25% food by FY21 from ~22% mix by FY21. Food has consistently contributed ~100-200bps of SSS growth over the last currently several years, which we expect to continue going forward supported by strength in core items & platforms and strong innovation.

Figure 31: Food sales are expected to double Figure 30: Food currently represents 22% of sales between FY16 and FY21, driven by outsized growth and is targeted to reach 25% by FY21. at lunch (2x+) and breakfast (2x).

26% 2x+ 24% 2x 2x ~2x 22% 1.5x 1.5x 20%

18%

16% Food Sales Growth Food Food as US of % Sales 14%

12%

FY13-FY16 FY16-FY21 FY13-FY16 FY16-FY21 FY13-FY16 FY16-FY21

2010 2011 2012 2013 2014 2015 2016 2017 2018

2020E 2021E 2019E Food Breakfast Lunch

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Breakfast has been a stronghold for the food category, with attachment still a significant opportunity as Starbucks introduces new products and platform extensions. Breakfast sandwiches have had strong attachment, with sales that have more than doubled over the last four years, now representing 30%+ of total food sales. The introduction of Sous Vide Egg Bites highlights the potential of the food innovation pipeline, representing robust 60%+ growth in its first year. Going forward, SBUX expects breakfast sales to double, supporting overall food sales of ~$3BN+ by FY21. Beyond breakfast, we believe lunch remains a largely underappreciated opportunity given strong beverage traffic at lunch. But challenges exist for Starbucks to penetrate customer consideration sets as a viable lunch competitor. We believe Starbucks’ positioning to offer fresh and healthy lunch options is a prudent strategy to attempt to become more associated with the lunch daypart and assuage potentially negative food quality perceptions, though somewhat limiting given Starbucks does not have kitchens. In F2Q17, Starbucks launched Mercato in 100 stores in the Chicago market, a lunch menu prepared fresh and delivered to stores. Following positive feedback over the last several quarters, Mercato has now been rolled out to a total of ~1,300 restaurants, with additional markets including Los Angeles, San Francisco, Seattle, Sacramento and New York. Given Starbucks’ positioning toward the more premium side of the spectrum, we believe a focus on healthy and fresh is complementary to its messaging. That said, it’s unclear whether Mercato will be rolled out more meaningfully across the system. Starbucks has also partnered with Princi, a high-end, artisanal Italian bakery, which is incorporated in Starbucks’ elevated concepts, including its Roasteries and Reserve stores. In addition, Starbucks could open stand-alone Princi bakeries featuring Starbucks Reserve coffee, with one currently open in NYC. We believe that Starbucks has smartly combined its premiumized concept with elevated food offerings. We don’t expect Siren Retail to meaningfully contribute to portfolio sales over the near-term, though view the Roasteries and Reserve stores as separate use occasions, appealing to a higher-end experience. It appears Starbucks has slowed down growth in these alternative concepts.

Starbucks Corporation (SBUX) 16 25 June 2019

Figure 32: We expect food to contribute ~1-2% pts to US comp growth, consistent with contribution of ~1-3% over the last few years. 10.0%

8.0%

6.0%

4.0% US SSS 2.0%

0.0%

4Q14 4Q16 3Q18 2Q14 3Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 4Q18 1Q19 2Q19 Food Contribution Other SSS Contribution

Source: Company data, Credit Suisse estimates

Better operations + higher employee satisfaction = improved customer experience Opportunities to improve operations and throughput exist to enhance the customer experience, which should flow through to results over time. SBUX has already indicated improved operations and in-store experience have positively contributed to afternoon performance over the recent quarters. Through more dynamic labor scheduling (based on individual store mix, traffic, patterns, etc.), stores can strategically deploy labor to value-added tasks, reduce administrative responsibilities and improve productivity. SBUX has also removed SKUs in stores to reduce complexity and improve inventory management. Starbucks is implementing technology, the Digital Order Manager (DOM), to facilitate the mobile order & pay experience. DOM replaces the paper-based ticket consolidation process with a touchscreen order consolidation tool to expedite the ordering process for store operators. DOM also sends a mobile notification to customers when their orders are ready at the handoff plane, which should help reduce congestion, provide for labor efficiencies (customers waiting at handoff plane are not asking baristas for orders) and improve the customer experience (customers not waiting for orders at handoff). Longer-term, we expect Starbucks to design stores with improved spacing and production capacity, which should help improve throughput. Given increasing mobile order & pay utilization, stores will likely have more dedicated areas to reduce congestion. More pronounced separate areas could also provide opportunities for in-store marketing of mobile order & pay, increasing awareness of the features and benefits. We expect a combination of operational enhancements could help reduce complexity and non-value added tasks. This should help drive improved employee satisfaction, leading to a better customer experience and SSS benefits. We view Starbucks as one of the better positioned companies given significant labor investments and a focus on prioritizing its employees.

Starbucks Corporation (SBUX) 17 25 June 2019

Employee satisfaction above peers Based on our analysis of employee satisfaction ratings over time through ratings on Glassdoor, investments and initiatives to enhance employee satisfaction appear to be resonating. Starbucks consistently ranks above other limited service restaurant chains in overall satisfaction and satisfaction with compensation and benefits. We expect continued investment in partners and enhancements of in-store operations to benefit the brand overall. More satisfied employees should reduce turnover and improve retention, which Starbucks has indicated is ~15-20 points above the food & beverage industry average. This should in turn lead to better execution and an enhanced customer experience, driving SSS benefits over time.

Figure 34: Starbucks has made notable Figure 33: Starbucks satisfaction ratings have improvement in its employees’ ratings of comp & steadily increased over time, up to a rating of ~4 benefits, an increase of 0.13pts in 2018, lapping a (out of 5) in 2018. 0.12 increase from 2017.

4.20 4.00 3.90 4.00 3.80 3.70 3.80 3.60 3.60 3.50 3.40 3.40 3.30

Overall Overall Satisfaction Rating 3.20 3.20

Comp Comp Benefits & Satisfaction Rating 3.10 3.00 3.00 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Thinknum, Glassdoor, Credit Suisse estimates Source: Thinknum, Glassdoor, Credit Suisse estimates

Figure 36: Employee satisfaction with compensation Figure 35: Employee satisfaction is highest among & benefits is also highest at Starbucks, a reflection Starbucks employees relative to restaurant peers, of its competitive offering and a factor driving above an increase of ~0.3 points over the last five years. average retention. Change Comp & Benefits Change Overall Satisfaction 2013 2018 2013 2018 2018 vs 2013 Satisfaction 2018 vs 2013 Starbucks 3.64 3.97 +0.3 Starbucks 3.58 3.92 +0.3 Taco Bell 3.06 3.82 +0.8 Chipotle 3.21 3.67 +0.5 Chipotle 3.35 3.77 +0.4 Shake Shack 3.00 3.30 +0.3 Domino's 3.36 3.58 +0.2 Noodles 2.64 3.01 +0.4 Pizza Hut 2.98 3.56 +0.6 McDonald's 2.42 2.89 +0.5 McDonald's 3.04 3.55 +0.5 Taco Bell 2.48 2.85 +0.4 Wingstop 2.89 3.52 +0.6 Potbelly 2.41 2.74 +0.3 Noodles 3.55 3.45 -0.1 Domino's 2.54 2.74 +0.2 Wendy's 2.99 3.45 +0.5 KFC 2.60 2.70 +0.1 KFC 3.17 3.39 +0.2 Wendy's 2.40 2.70 +0.3 Burger King 2.75 3.39 +0.6 Pizza Hut 2.36 2.66 +0.3 Papa John's 2.81 3.31 +0.5 Burger King 2.26 2.62 +0.4 Dunkin' Brands 3.10 3.31 +0.2 Popeyes 2.31 2.49 +0.2 Shake Shack 2.97 3.28 +0.3 Papa John's 2.23 2.47 +0.2 Popeyes 2.93 3.25 +0.3 Wingstop 3.14 2.44 -0.7 Sonic 3.00 3.19 +0.2 Dunkin' Brands 2.05 2.43 +0.4 Pollo Loco 3.71 3.13 -0.6 Sonic 2.20 2.43 +0.2 Potbelly 2.76 3.08 +0.3 Tim Hortons 2.48 2.42 -0.1 Tim Hortons 3.01 3.06 +0.1 Pollo Loco 2.71 2.22 -0.5 Jack in the Box 2.97 3.06 +0.1 Jack in the Box 2.47 2.16 -0.3 Industry Average 3.10 3.41 +0.3 Industry Average 2.58 2.74 +0.2 Source: Thinknum, Glassdoor, Credit Suisse estimates Source: Thinknum, Glassdoor, Credit Suisse estimates

Starbucks Corporation (SBUX) 18 25 June 2019

Mission-forward brand favorable in current environment Starbucks has often taken a stance on popular issues in the media, from political responses to accelerating the movement against plastic straws. Starbucks invests in farmers, raises money for select charities/foundations, is rolling out a new program to donate ready-to-eat meals to food banks and sets ambitious goals to support underprivileged cohorts, such as its goal to hire 25,000 veterans and military spouses through 2025. Starbucks also offers partners opportunities to earn college degrees through the Starbucks College Achievement Plan, an unprecedented benefit in restaurant employment. We believe Starbucks has been grounded and continues to operate as a company seeking to do good and give back to the community. That said, we are not sure if the company fully gets credit for all of its favorable initiatives. The stigma of a “large, corporate” company could weigh on perceptions, while the large number of initiatives could muddle the messaging. With consumers favoring mission-forward brands, we believe Starbucks is well positioned as long as it gets the credit and favorable media attention with the right messaging. Ongoing remodels support operational changes Starbucks is now in its third year of a five-year renovation program across ~7,000 stores. The renovation program is intended to keep the brand relevant and updated, though comes at a good time given consumer structural changes and increasing shifts toward digital ordering. Equipment innovation appears to be the first priority, supportive of new innovation such as Nitro. We also expect Starbucks to take advantage of the opportunity for layout changes to reduce in-store friction with higher mobile order & pay utilization and the beginning of the rollout of delivery. Opportunities for new formats also exist, such as MOP stores, small units, and more drive-thrus as Starbucks looks to continuously optimize its portfolio of stores. Competitive and consumer pressures as headwinds Starbucks not immune to consumer challenges Over the last decade, Starbucks has demonstrated impressive growth, with US SSS averaging ~5% over the last ten years, largely outpacing the industry average. But the company is not immune to consumer and macro challenges. In 2008/2009, SSS turned negative for eight consecutive quarters, underperforming the broader restaurant industry by an average of ~600bps. The consumer backdrop historically appears to have affected Starbucks with a greater magnitude given its relative outperformance and underperformance. More recently, Starbucks’ outperformance gap to industry peers has contracted despite a favorable consumer backdrop. We’re encouraged Starbucks returned to outperformance in F4Q18 (CY3Q18), which has continued for three consecutive quarters, a favorable sign following four quarters of limited outperformance.

Starbucks Corporation (SBUX) 19 25 June 2019

Figure 38: Starbucks has historically demonstrated Figure 37: Despite strong comps over the last 10+ a greater magnitude of impact from the consumer years, Starbucks exhibited eight consecutive qtrs. backdrop, underperforming the industry by ~600bps of negative SSS in 2008/2009 amidst a difficult in 2008/2009 compared to historical consumer backdrop. outperformance.

15% 15%

10% 10%

5% 5%

0% 0%

SSS US US SSS -5% -5%

-10% -10%

-15% -15%

2Q11 2Q14 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 1Q12 4Q12 3Q13 1Q15 4Q15 3Q16 2Q17 1Q18 4Q18

2Q11 2Q14 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 1Q12 4Q12 3Q13 1Q15 4Q15 3Q16 2Q17 1Q18 4Q18

Traffic Avg Check SBUX US SSS Restaurant Industry SSS

Source: Company data, Credit Suisse estimates Source: Company data, Consensus Metrix, Credit Suisse estimates

Heightened competition from high and low end peers Starbucks continues to face increasing levels of competition at both the high and low end of the spectrum. Third wave coffee peers are emerging with elevated menus, community engagement and digital/loyalty offerings. These formidable competitors make it more difficult for Starbucks to differentiate, though we recognize the impact is limited given the size and geographical dispersion of Starbucks relative to these competitors. Further, third wave coffee peers are often priced above Starbucks, making it more difficult to be habitual everyday consumers through different cycles. We would expect Starbucks consumers to have a high crossover with third wave coffee consumers, which could be particularly impactful for Starbucks’ less frequent consumer cohort, which the company has had some challenges with recently. This underscores the importance of establishing digital relationships with more consumers, reducing the friction of conversion to the loyalty platform and continuously evolving the menu, experience and digital ecosystem. In addition to traditional coffee peers, Starbucks is facing intensified competition from competitors on the lower end of the spectrum. McDonald’s has elevated its McCafé platform, encouraging trial at competitive prices and offering its first digital loyalty program with McCafé beverages. We expect the lineup of attractively priced Frappé beverages and sweet espresso drinks has had an impact on Starbucks’ decelerating Frappuccino category (~70% of Starbucks restaurants face competition from McDonald’s within a 1 mile radius). While not new, convenience stores are also offering coffee at competitive prices, with coffee being a high margin traffic driver. With “higher end” convenience stores like Wawa featuring $1 any size coffee, we expect Starbucks could face some impact, at least at the margin.

Starbucks Corporation (SBUX) 20 25 June 2019

Figure 40: Smaller peers represent limited Figure 39: Large coffee chains still represent competitive overlap, though together could be more primarily all of the coffee segment growth. meaningful.

10.0% McDonald's 28% 46% 70% 97% 99% 9.0% Dunkin' 14% 22% 32% 59% 70% 8.0% Peet's 15% 21% 7.0% Coffee Bean & Tea Leaf 11% 15% 6.0% Caribou 4% 12% 5.0% Wawa 7% 9% 4.0% Tim Hortons 8% 3.0% Blue Bottle 7% 2.0%

Coffee Segment Coffee Segment Sales Growth Scooter's 4% 1.0% Biggby 0.0% 3% 2012 2013 2014 2015 2016 2017 2018 % SBUX Base Facing Competition From Select Peers

Large Coffee Chains Small Coffee Chains 0.25 Miles 0.5 Miles 1 Miles 3 Miles 5 Miles

Source: Technomic, Credit Suisse estimates Source: Thinknum, Credit Suisse estimates

Cannibalization Starbucks has exhibited unit growth of ~5% in the US over the last five years. While Starbucks has continuously indicated minimal comp impact, the decision to slow company store and licensed store growth and close ~100 incremental company stores above the normal run rate indicates cannibalization could be higher than initially expected. We expect a more prudent growth strategy could benefit comps in the near-term, as stores benefit from a reverse sales transfer and there is reduced pressure from slower growth. Based on our geospatial analysis, 64% of Starbucks stores face competition from another Starbucks within a 1 mile radius and 45% within just 0.5 miles. For comparison, among Dunkin’s ~9,000 US stores, 42% compete with another Dunkin’ within 0.5 miles and 22% within a 1 mile radius.

Figure 42: Starbucks faces the greatest cannibalization based on store location among Figure 41: 64% of Starbucks stores face select peers, though in part is due to its larger base. competition from another Starbucks within just a 1 42% of its store base faces competition from mile radius. another Starbucks within just 0.5 miles.

Starbucks 30% 45% 64% 91% 95% 0.1 Miles 9% ~64% of Starbucks' McDonald's base faces competition 13% 69% 79% Dunkin' 10% 22% 42% 79% 90% 0.25 Miles 30% from another Starbucks within a 1 Peet's 9% 19% 30% 66% 82% mile radius Coffee Bean & Tea Leaf 7% 17% 36% 72% 83% 0.5 Miles 45% Caribou 16% 26% 38% 68% 77% Wawa 12% 71% 89% 1 Mile 64% Tim Hortons 22% 67% 80% Blue Bottle 7% 30% 50% 87% 90% 3 Miles 91% Scooter's 21% 62% 74% Biggby 51% 69% 5 Miles 95% % Base Facing Competition From Same Brand

% SBUX Base Facing Competition From Another SBUX 0.25 Miles 0.5 Miles 1 Mile 3 Miles 5 Miles

Source: Thinknum, Credit Suisse estimates Source: Thinknum, Credit Suisse estimates

Starbucks Corporation (SBUX) 21 25 June 2019

Can SBUX achieve long-term EPS growth of 10%+? Credit Suisse View Yes, we believe SBUX can generate EPS growth of at least 10% over the next several years. Revenue growth of 7-9% and modest margin expansion should generate operating income growth of ~8-10%, and together with benefits from share repurchases, should lead to EPS growth of at least 10%. We model an EPS CAGR of ~14.5% through FY22, with some variability each year. For FY19, we model EPS growth of ~15%, including a ~3% tax-related benefit from F1Q19 and ~1-2% of pressure from the Nestlé Global Coffee Alliance. We model EPS of ~14% post-2019, including ~17% in FY21 which includes a 53rd week. We estimate revenue growth of ~8% through FY22, including global SSS of ~3% and unit growth of ~6.5%. Contribution from beverage innovation, digital initiatives, food enhancements, improved operations and delivery give us confidence in achieving Americas SSS of ~3.5% long term. A more tempered unit growth strategy in the US should also relieve some incremental pressure. Global unit growth of ~6.5% will be driven by ~50% contribution from CAP, ~30% from Americas and ~20% from licensed partners in EMEA. Gains from sales leverage and cost efficiencies are expected to be largely offset by strategic investments, rising commodities, product mix shift toward food and wage inflation, for relatively stable operating margins of 17-18%. Greater sales leverage in the US to drive margin expansion and better-than-expected traction in China from recent initiatives represent the greatest sources of upside to our estimates. Consensus Expectations Consensus estimates EPS growth of ~13% over the next four years, including ~15% in FY19. Revenue growth of ~7.5%, ~40bps of operating margin expansion per year post- 2019 and repurchases representing ~20% of SBUX’s market cap drives consensus EPS growth through 2022. Long-term earnings story still intact We view SBUX as one of the best long-term growth stories in large-cap consumer, with strong earnings potential and significant runway for growth. More conservative long-term guidance of at least 10% EPS growth should better position the company to at least meet targets, and we see opportunities for a return to beat and raises we haven’t seen in several years. Long-term guidance encompasses revenue growth of 7-9%, including US & global SSS of 3-4% and net unit growth of 6-7%, with modest margin expansion for operating income growth of ~8-10%, and accretion from share repurchases. FY19 guidance is somewhat below long-term targets, largely driven by dilution from the Global Coffee Alliance with Nestle, including revenue growth of 5-7%, operating income growth of 0-2% and core EPS growth of 8-10% (updated guidance largely reflects benefit from tax-related items in F1H). We model revenue growth of ~6.5%, operating income growth of ~2% and EPS growth of ~15%, translating to EPS of $2.79, at the high end of guidance of $2.75-2.79 (initial guidance increased twice). In our view, guidance appears largely achievable, and should eliminate any outstanding overhang on the stock from what previously appeared to be “stretch” guidance. SBUX has lowered the bar on Americas SSS, targeted China SSS below Americas and has guided to margin management over margin expansion.

Starbucks Corporation (SBUX) 22 25 June 2019

Figure 43: SBUX long-term EPS algorithm of 10%+ includes revenue of 7-9%, modest margin expansion and benefit from ~2%+ from share repurchases. 16% SBUX Long-Term EPS Growth Algorithm 14%

12% 2-3% 10%+ 10% 6-7% 1-2% 8%

6% 3-4%

4% EPS Growth EPS Growth Contribution 2%

0% SSS Unit Growth Margin Share EPS Growth Expansion Repurchases

Source: Company data, Credit Suisse estimates

Figure 45: We model EPS growth of ~14.5% over the next few years, relative to consensus Figure 44: SBUX has demonstrated impressive EPS expectations of 13%. For 2019, CS and consensus growth of 20%+ over the last ten years. model ~15%, at the high end of guidance.

$3.00 45% $4.50 18% 40% 17% $2.50 $4.00 16% 35% 15% $2.00 30% $3.50 14% 25%

$1.50 $3.00 13% EPS EPS $

EPS EPS $ 20% 12% $2.50

$1.00 15% 11% EPS Growth EPS % Growth YOY 10% EPS Growth YOY% $2.00 10% $0.50 9% 5% $1.50 8%

$0.00 0% 2019E 2020E 2021E 2022E

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EPS $ EPS Growth YOY% CSe EPS Consensus EPS CSe YOY % Consensus YOY %

Source: Company data, Credit Suisse estimates Source: Company data, Consensus Metrix, Credit Suisse estimates Note: FY21 includes 53rd week. It is unclear whether consensus is including the extra week.

Top-line growth fueled by strong SSS and robust unit growth Achievability of long-term guidance is dependent upon top-line revenue growth in the high- single digits. SSS of 3-4%, global unit growth of 6-7% and moderate CPG growth should support system revenue growth of 7-9%. We model global SSS of ~3.3% and global unit growth of ~7% through FY22 for a revenue CAGR of ~7.7%, including choppiness from revenue dilution from the Global Coffee Alliance in FY19 and the 53rd week in FY21. Consensus expectations are for global revenue growth of ~7.4%, including global SSS of ~2.7% and global unit growth of ~7%.

Starbucks Corporation (SBUX) 23 25 June 2019

SSS We model global SSS of 3.4% in FY19 and ~3.2% long term, including contribution from Americas SSS of ~3.5%, EMEA of ~1.5% and CAP of ~2.5%.  Americas – Our Americas SSS estimates of ~3.7% in FY19 and ~3.5% long term include contribution from digital, beverage innovation, and enhanced food offerings. Initiatives to improve operations, continued remodels and delivery could represent upside.  EMEA – Our EMEA SSS estimates of 0.2% in FY19 and ~1.5% long term represent acceleration from approximately flat over the past three years. Reported SSS largely reflects company-operated exposure to the UK (~80% of EMEA company-operated units). We note EMEA has relatively minimal impact on consolidated SBUX, representing just 4% of total revenue, ~3% of revenue growth contribution and ~2% of operating income.  CAP – Our CAP SSS estimates of ~2.5% in FY19 and long term represent relatively conservative estimates given historical SSS performance, recent improvement in Japan and increasing contribution from China. Over the last five years, CAP has exhibited average SSS of 4.5%. While Japan has had some softness in recent years, the market returned to positive comps in F2Q18 and 4%/3% growth in F1Q19/F2Q19, including positive transaction growth for three consecutive quarters. Aggressive digital and delivery initiatives in China should help the market improve results even against increasing competition. Unit Growth We believe Starbucks has a significant global growth opportunity ahead, following an ~8%+ unit growth CAGR over the last five years. We model 6.6% growth over the next four years, including ~3.5% in the Americas, ~10% in EMEA and ~11-11.5% in CAP (including ~15% in China). This compares to Consensus Metrix long-term expectations for 6.8% global growth, with ~3.5% the Americas, ~11.5% in EMEA and ~11.5% in CAP.  Americas – We expect Americas unit growth of ~3.5% over the next few years, reflecting a step down from 5.3% over the last five years. This is in-line with SBUX’s target for US unit growth of 3-4%, which represents ~75-80% of unit growth contribution.  EMEA – We expect EMEA unit growth of ~10%, slightly below average growth of ~11% over the last five years. We model 400 units per year, all coming from licensed partners.  CAP – We estimate CAP unit growth of ~11-11.5%, including ~55% unit growth contribution from China. This represents a deceleration from prior years averaging ~17%, though on top of a now larger base.

Starbucks Corporation (SBUX) 24 25 June 2019

Figure 47: The Americas segment has comprised ~40% of global unit growth, with CAP’s robust Figure 46: Starbucks has exhibited global unit growth rates representing ~45%+ of global unit growth of ~8% over the last five years. growth and EMEA with ~15%.

35,000 9.5% 10.0%

9.0% 30,000 8.0% 8.5% 6.0% 25,000 8.0% 4.0%

20,000 7.5% Global Global Units

7.0% 2.0% Global Global Unit Growth 15,000 6.5% Global Global Unit Growth YOY% 0.0%

10,000 6.0% -2.0% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Units Unit Growth Americas EMEA CAP Other

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 49: We expect CAP to represent ~50% of unit Figure 48: Going forward, we model global unit growth over the next few years, with Americas to growth of 6.6% through FY22, near the midpoint of comprise ~30% of global growth and EMEA with long-term guidance of 6-7%. ~15-20%.

7.5% 8.0%

7.0% 7.0% 6.0% 6.5% 5.0% 6.0% 4.0% 5.5% 3.0%

Global Global Unit Growth 2.0% 5.0% Global Global Unit Growth 1.0% 4.5% 0.0% 4.0% 2019E 2020E 2021E 2022E CSe Americas CSe EMEA CSe CAP CSe Consensus SBUX Target Consensus Americas Consensus EMEA Consensus CAP

Source: Company data, Consensus Metrix, Credit Suisse estimates Source: Company data, Consensus Metrix, Credit Suisse estimates

Margin expansion opportunities remain Sales leverage, cost efficiencies from COGS and G&A savings and segment-specific opportunities should benefit margins, though increasing labor pressure, a greater product mix shift toward lower-margin food items, strategic investments and higher commodity costs are expected to largely offset gains. We estimate margin contraction of ~80bps to 17.2% in FY19. Starting in FY20, we model ~40bps of improvement per year, reflecting expansion in Americas, EMEA and CAP segments. We view SBUX guidance for stable operating margins as conservative, with upside possible should top-line exceed expectations. We expect SBUX can generate operating margin leverage if Americas SSS are ~4%, with 3% likely supporting flat margin growth and below mid-single-digit pressuring margins.

Starbucks Corporation (SBUX) 25 25 June 2019

Benefits from sales leverage and cost management to support improved margins COGS SBUX has targeted total COGS savings of ~$1.4BN over a total of seven years across sourcing, supply chain, waste, product mix and other efficiencies. We estimate SBUX has executed ~$750MM of its total COGS savings target from FY15-FY18. SBUX appears to have an additional ~$650MM of savings identified, and upside could be possible (SBUX already increased the target from $1BN initially to $1.4BN). We anticipate the impact of slower comps and greater food mix in recent quarters are offsetting benefits from COGS savings flow through. SBUX has indicated waste reduction as a more controllable opportunity near-term. New accounting guidance related to store value card breakage fees has generated margin benefit in FY19, reclassifying the fees to revenue from interest income, previously. Accelerating beverage growth is also a key focus to drive margin improvement. We model ~80bps of margin deleverage on a consolidated basis in FY19, primarily driven by the Channel Development segment. Long term, we model largely flat COGS margins, with benefits from COGS savings initiatives offset by the drag from a higher food mix and less leverage given our expectations for SSS of ~3.5% going forward (relative to mid- single digits historically). G&A Savings Over the last several years, SBUX has highlighted opportunities to reduce core G&A spend through scalable core processes, continuous improvement, organizational streamlining and targeted savings, with a long-term goal of growing core G&A, which represents about 80% of the total, at half the rate of revenue. More recently, SBUX has set a target to reduce total G&A to 3.5% of system sales, from 4.5% currently. SBUX has also hired an outside consultant to identify and accelerate savings opportunities, with savings to come over the next three years. Targeted cost savings should help offset continuous investments in partners and digital initiatives.

Figure 50: G&A is expected to reach 3.5% of system Figure 51: Expectations are for G&A to grow sales by the end of FY21, from ~4.5% currently. minimally over the next several years.

$2,000 4.8% $1,770 8.0% 7.0% $1,800 4.6% $1,760 4.4% 6.0% $1,600 $1,750 4.2% 5.0% $1,400 4.0% $1,740 4.0%

$1,200 3.8% $1,730 3.0% G&A G&A ($MM)

G&A ($MM) 2.0%

3.6% YOYGrowth % $1,000 $1,720 3.4% 1.0%

G&A G&A % as of System Sales $1,710 $800 3.2% 0.0% $600 3.0% $1,700 -1.0%

2019E 2020E 2021E 2022E

2018 2014 2015 2016 2017

2019E 2020E 2021E 2022E CSe Consensus CSe YOY % Consensus YOY % G&A ($MM) G&A as % of System Sales

Source: Company data, Credit Suisse estimates Source: Company data, Consensus Metrix, Credit Suisse estimates

Starbucks Corporation (SBUX) 26 25 June 2019

Streamlined operations support greater leverage Over the last 12-18 months, SBUX has partnered with Nestlé to sell and distribute its CPG products globally, closed its nearly 400 Teavana retail stores, sold the TAZO brand (~$400MM) to solely focus on Teavana and eliminated its e-commerce operations to better leverage its channel partners. These activities highlight a sharpened focus to eliminate less profitable activities which should provide efficiencies and improved margins for the business.

Efficiencies to drive segment margin opportunities Americas Margins have contracted ~350bps over the last two years as slowing comps have not been enough to offset robust investments in digital and partner initiatives and increasing food mix (lower margins), raising questions as to whether such elevated investments are driving sufficient returns. We believe SBUX’s long-term focus is the right strategy for the brand, as the company prioritizes its employees and seeks to maintain its digital leadership. Higher retention is key to support better operations and enhanced customer service, which should drive benefits long term. Further, as companies continue to shift toward digital, increased differentiation and continued leadership remain paramount for the brand that has helped evolve the restaurant digital landscape and increase adoption. We model ~30bps of margin improvement in 2019, in-line with guidance for a slight increase, and relatively flat margins going forward. Higher-than-expected SSS, especially if driven by beverage growth, could generate margin leverage better than we are modeling. Consensus models relatively similar margins going forward. CAP maintains underappreciated margin expansion opportunity CAP is the fastest growing segment and we believe margin growth should follow suit, with expectations for expansion behind improved efficiencies, benefits from scale and sales leverage. The CAP margin decrease in FY18 was largely due to the impact of the East China transaction, with underlying operating margins moderately expanding. We model ~15bps of margin expansion to 24.4% in FY19, relative to guidance of approximately flat and consensus expectations of 24%. Longer-term, we model ~20bps of CAP operating margin expansion (guidance: relatively flat margins, though still remain below prior peak margin levels. This compares to consensus expectations for CAP margins contraction of ~20bps per year.

Figure 52: Despite structural changes in the CAP region (JV divestures/acquisitions), CAP has Figure 53: We model above-consensus CAP maintained strong margins which we believe should margins of ~25% by FY22, relative to consensus expand over time. expectations for margin contraction.

36% 36.0% 34% 34.0% 32% 32.0% Acquisition of 30% 30.0% Acquisition of remaining shares in remaining share in 28% 28.0% Starbucks Japan East China JV

26% 26.0% CAP Operating CAP Operating Margin 24% CAP Operating Margin 24.0% 22% 22.0%

20% 20.0%

2013 2017 2011 2012 2014 2015 2016 2018

2013 2014 2015 2016 2017 2018

2021E 2019E 2020E 2022E CSe Consensus Actual

Source: Company data, Credit Suisse estimates Source: Company data, Consensus Metrix, Credit Suisse estimates

Starbucks Corporation (SBUX) 27 25 June 2019

Optionality around capital structure for EPS upside SBUX has increased its leverage with its repositioning as a “growth at scale” company, targeting a maximum leverage of 3x lease-adjusted EBITDAR. On a relatively comparative basis, SBUX’s ~1.5-2x total debt to TTM EBITDA is below most peers, though most peers also have higher franchised/licensed businesses. SBUX has committed to return $25BN of capital in FY18 through FY20, and we expect ~80% to come from share repurchases and ~20% from dividends. Going forward, we think incremental leverage could support further repurchases and earnings upside.

Figure 54: Starbucks is targeting lease-adjusted leverage of up to ~3x EBITDAR, a step up from ~1.5- Figure 55: On a comparative basis, SBUX leverage 2x over the last several years. of ~1.5-2x is relatively low compared to peers.

3.5x 2.5x

3.0x SBUX is targeting 2.0x lease-adj 2.5x leverage up to 1.5x

~3x

adj adj debt/EBITDAR) -

2.0x 1.0x Debt/TTM Debt/TTM EBITDA

1.5x 0.5x Leverage (Lease

1.0x 0.0x

2016 2016 2011 2012 2013 2014 2015 2017 2018 2011 2012 2013 2014 2015 2017 2018

2019E 2019E 2021E 2022E 2020E 2021E 2022E 2020E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 56: Over the last four years, SBUX has Figure 57: Over the next four years, we expect returned a cumulative ~$18BN to shareholders SBUX to return ~$28.5BN to shareholders through through repurchases and dividends. repurchases and dividends.

$10,000 $14,000 $9,000 $12,000 $8,000 $7,000 $10,000

$6,000 $8,000 $5,000

$4,000 $6,000

$ in in $ Millions $ in in $ Millions $3,000 $4,000 $2,000 $2,000 $1,000 $0 $0 2015 2016 2017 2018 2019E 2020E 2021E 2022E

Share Repurchases Dividends Share Repurchases Dividends

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Starbucks Corporation (SBUX) 28 25 June 2019

What is the long-term outlook for China? Credit Suisse View Starbucks has consistently reiterated China will one day be the largest market in the company’s portfolio, supported by a growing coffee culture, increasing middle class and strong brand affinity. Despite recent softness, we expect China to become a more meaningful contribution to overall growth as the region outpaces growth relative to the existing portfolio. Current targets include net unit growth in the mid-teens, comprising ~80% of revenue contribution and SSS of 1-3%. We model a net unit growth CAGR of ~15% in China through FY22, or an average of ~650 units per year, representing ~55% of CAP unit growth. We estimate CAP unit growth of ~11-11.5% through FY22. Solid fundamentals and an attractive coffee backdrop support current expansion trends, with a slate of initiatives in place to drive momentum. The comp base now comprises units from the East China JV (started in F2Q19), making China a more meaningful contributor to reported CAP SSS (which just includes company- operated stores). We estimate China will represent ~55% of the comp base starting in FY19, relative to ~35% previously. We model CAP SSS of 2.8% in FY19 and ~2.5% long term. Consensus Expectations Consensus does not explicitly model China. For CAP SSS, consensus expectations are 2.7% in FY19 and ~2.5% long term. For unit growth, consensus models ~11.5% over the next several years.

Competition and cannibalization to pressure comps, but opportunities to reaccelerate Following 34 consecutive quarters of mid-single-digit comp growth, China SSS have decelerated in recent quarters, including -2% in F3Q18, 1% in F4Q18/F1Q19 and 3% in F2Q19. Robust unit growth of ~30% over the last five years has been identified as a source of pressure, though intensified competition in the market is likely the primary driver of the SSS slowdown. We believe increasing competition has been the main driver of China’s comp slowdown over the last several quarters. Competitors are focusing on the digital and delivery opportunities in the market, increasing convenience and capitalizing on a different need state. While Starbucks has traditionally focused on the “third place” experience, competitors have capitalized on the off-premise opportunity. We expect select competitors will continue to demonstrate aggressive growth trends backed by investor capital. Long term, Starbucks has targeted China SSS of 1-3%, reflective of pressures from robust store growth, intensified competition, a softer macro backdrop and a drag from the East China stores which were included in the base starting in F2Q19. We believe there is room for upside to SSS targets given historical trends, brand strength, a growing coffee market and a slate of initiatives being implemented by Starbucks to support sales growth. The addition of mobile order & pay and delivery should also better position Starbucks against competitors within the growing digital/delivery market.

Starbucks Corporation (SBUX) 29 25 June 2019

Figure 58: Brand momentum and a growing coffee culture have supported robust China SSS and traffic Figure 59: The China coffee market is expected to trends, though heightened competition has weighed grow to $7.5BN by 2022, reflecting a 5x increase on growth in recent quarters. from 2012.

14% $8BN

12% $7BN 10% $6BN 8% $5BN 6%

4% $4BN China China SSS

2% $3BN China China Coffee Market

0% $2BN -2% $1BN -4%

$0BN

3Q16 2Q18 2Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 3Q18 4Q18 1Q19 2Q19 1Q16 2012 2017 2022E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Intensified competition from Luckin Coffee likely to continue We believe increasing competition has been the main driver of China’s comp slowdown over the last several quarters, with Luckin Coffee as the largest and fastest growing coffee competitor. Luckin Coffee has exhibited aggressive unit growth over the last year, reaching ~2.4K stores/points of distribution as of March 2019, and a targeted 4.5K stores by the end of 2019. The Chinese startup is valued at nearly $3BN, up from ~$2.2BN at the end of 2018, with investor capital funding losses from deep discounts, high marketing and advertising costs and high customer acquisition costs. We expect Luckin Coffee will continue to attract capital over the medium-term given strong traction among Chinese customers in a short time period. The company capitalized on the growing coffee category and consumer trends shifting to digital/delivery, with its small store footprint, minimal required labor given reliance on digital, and high margin product supporting the potential for strong future returns. The company uses technology (i.e., heat maps; dynamic pricing) to identify locations for growth depending on population/density, with office buildings seemingly a main focus area for the company, and more effectively target customers. Luckin is able to identify and open units very quickly given its small footprint and minimal upfront investments. Headline store count isn’t directly comparable to Starbucks stores though, as Luckin’s stores are more points of distributions than brick & mortar locations. We believe this is a key difference and consideration, as AUVs are not as high as Starbucks and the use case could be very different than Starbucks. Deep discounts and subsidies are expected to continue as the Chinese coffee chain grows, though the magnitude will likely be reduced. Changes in the company’s second year of operations include: 1) free delivery for orders over 55 yuan (~$8 USD), previously 35 yuan (~$5 USD) and 2) promotional offer now “buy two, get one free” (previously offered “buy two, get one free” and “buy five, get five free”). This could be a small positive for Starbucks as the level of discounting is reduced, though the company’s increasing penetration likely offsets much benefit.

Starbucks Corporation (SBUX) 30 25 June 2019

Figure 60: Luckin Coffee has demonstrated Figure 61: Luckin Coffee has demonstrated impressive impressive growth since it was founded in October growth, though at a high cost of acquisition with deep 2017, targeting ~4.5K stores by the end of 2019. discounts and expensive marketing.

5,000 4,500 4,000 3,500 3,000 2,500 2,000

1,500 Luckin Luckin Coffee Stores 1,000 500 0 May-18 July-18 Nov-18 Dec-18 2019E

Source: PitchBook, Credit Suisse estimates Source: Luckin Coffee Website/App

Based on our geospatial analysis, ~46% of Starbucks China’s base faces competition from Luckin Coffee within a 0.5 mile radius and ~57% of the base faces competition within a one mile radius. For comparison, ~67% of Luckin Coffee’s store base competes with Starbucks within a 0.5 mile radius and ~86% within a one mile radius.

Figure 62: ~46% of Starbucks China stores compete Figure 63: ~67% of Luckin Coffee stores compete with Luckin Coffee within a 0.5 mile radius and with Starbucks within a 0.5 mile radius and ~86% ~57% within a one mile radius. within a one mile radius.

0.1 Miles 13% 0.1 Miles 20%

0.25 Miles 32% 0.25 Miles 47%

0.5 Miles 46% 0.5 Miles 67%

1 Mile 57% 1 Mile 86%

3 Miles 66% 3 Miles 98%

5 Miles 68% 5 Miles 99%

% Starbucks China Base Facing Competition from Luckin Coffee % Luckin Coffee Base Facing Competition from Starbucks

Source: Thinknum, Credit Suisse estimates Source: Thinknum, Credit Suisse estimates

Starbucks Corporation (SBUX) 31 25 June 2019

Figure 64: Starbucks is relatively concentrated in Figure 65: As Luckin Coffee looks to grow market China given most stores are in the Tier 1 and Tier 2 share, it has concentrated growth, with ~67% of its cities. ~60% of Starbucks China’s base faces base facing competition from another Luckin Coffee competition from another Starbucks within a 0.5 store within a 0.5 mile radius and ~86% within a one mile radius and ~79% within a one mile radius. mile radius.

0.1 Miles 16% 0.1 Miles 12%

0.25 Miles 40% 0.25 Miles 40%

0.5 Miles 60% 0.5 Miles 66%

1 Mile 79% 1 Mile 85%

3 Miles 95% 3 Miles 97%

5 Miles 97% 5 Miles 99%

% Starbucks China Base Facing Competition from Starbucks China % Luckin Coffee Base Facing Competition from Luckin Coffee

Source: Thinknum, Credit Suisse estimates Source: Thinknum, Credit Suisse estimates

Starbucks brand strength and initiatives to support SSS acceleration China has historically demonstrated consistent and impressive SSS and traffic trends, reflecting brand strength and favorable coffee market trends. The company is positioned as a premium brand, which has historically been viewed as a status symbol for the Chinese customer. Innovation has also supported outperformance, with 85% of beverages and 100% of food offerings developed locally. Going forward, a rising middle class and increasing coffee culture should set a favorable backdrop for continued growth. Company-specific initiatives through continued innovation, digital partnerships with providers such as Tencent and Alibaba and the newly launched Starbucks Delivers should help reignite trends. Opportunities through CPG remain largely untapped, and with Starbucks’ recent partnership with Nestlé, we expect Starbucks to drive growth outside of retail stores. We believe Starbucks has launched initiatives to better compete in the off-premise channel to offset competitive headwinds, including the launch of a new loyalty program, rollout of delivery across ~60% of the China store base and expectations to add mobile order & pay by the end of FY19. Starbucks started testing mobile order ahead at the end of May in 300 stores in Shanghai and Beijing. Digital & Loyalty China’s My Starbucks Rewards loyalty platform has ~8.3MM active members, about half the size of the US, and has tripled in size over the last four years. Members have historically had to purchase a rewards card to be eligible to enter the program, reinforcing a status bar. China consumers tend to be more ahead than US consumers in digital, highlighting significant opportunities for a brand well ahead on digital in the US to transfer technologies and learnings. China has already surpassed the US in terms of digital payment, with 70% of tender through digital payment, including partnerships with mobile payment providers such as WeChat and Alipay. Starbucks has recently modified its loyalty program in China, which should better position the company against emerging competitors capitalizing on the off-premise opportunity with a digital and delivery focus. Starbucks has removed much of the friction of the loyalty program, with changes including: 1) free to join (previously purchase required), 2) customers can register through Starbucks and Alibaba apps (previously just Starbucks), and 3) members can redeem both food & beverage items (previously just beverages).

Starbucks Corporation (SBUX) 32 25 June 2019

Continued evolution of the digital ecosystem should help unlock growth opportunities on the platform, and we expect adoption of digital and delivery initiatives to surpass that of the US given China’s digitally forward culture. Digital opportunities in China are largely untapped and have significant runway for growth going forward.

Figure 67: The US has about 4x the number of stores than China, but 2-2.5x of the active loyalty Figure 66: China has more than 8MM active loyalty members, highlighting a digitally forward culture in members on its platform, which has tripled over the China. ~70% of tender in China is generated last four years. digitally, compared to ~40% in the US.

9.0MM ~8MM+ 14,778 8.0MM 7.0MM 6.0MM ~70% 5.0MM ~17MM 4.0MM ~40% 3.0MM Launched in ~8MM 3,789

2.0MM Feb 2011 China China Active MSRMembers 1.0MM

0.0MM China US China US China US FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Active Loyalty Members # of Stores Digital as % of Tender

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Note: Represents rewards members that have been active over the past 90 days.

Delivery We’re encouraged Starbucks has addressed some competitive challenges, partnering with Alibaba and Ele.me for an all-encompassing digital partnership. Starbucks Delivers is available through the Starbucks and Alibaba apps in more than 2,100 stores, reflecting a rapid rollout that began in September. Starbucks expects to expand delivery to 3,000 stores by the end of FY19. Starbucks is also leveraging Hema supermarkets through Star Kitchens to utilize their fulfillment and delivery capabilities, unlocking capacity constraints and an opportunity to acquire new customers. Splash-proof lids and tamper-proof packaging seals should help maintain the integrity of the delivery order. Delivery appears to be meeting expectations, with average orders delivered in under 20 minutes, higher average ticket and strong trial from existing Starbucks Rewards members. Delivery is a much larger channel in China than the US, and we expect strong adoption of Starbucks Delivers. Delivery is already contributing mid-single-digit transaction mix in SBUX’s key China markets (Beijing and Shanghai). Prior to F3Q18, unauthorized third party providers offered delivery to customers through their platforms.

Significant whitespace potential ahead China represents Starbucks’ second largest and fastest growing market, expanding at a ~30% CAGR over the last five years. SBUX has targeted a total of 6,000 stores by FY22, up from its initial target of 5,000 units by FY21. This implies ~600 units per year or a unit growth CAGR of ~14% over the next four years. Confidence in achievability comes from historical precedent and increased visibility and control of growth across the market given SBUX’s acquisition of the remaining 50% of the East China JV. China unit growth has represented ~55% of CAP growth and ~25% of total SBUX unit growth over the last five years. We estimate China growth to continue to drive ~55% of CAP growth going forward and ~30% of SBUX unit growth. Support from our expectations comes from a growing middle class, strong coffee culture, largely untapped digital and delivery opportunities, favorable unit economics and still significant whitespace opportunities.

Starbucks Corporation (SBUX) 33 25 June 2019

Figure 68: Starbucks in targeting ~6,000 units in Figure 69: Starbucks trails only KFC in the number China by FY22, implying a ~14% CAGR over the of total China units relative to Western brands, with next four years (relative to ~27% over the prior four), plans for robust expansion over the next several which we view as achievable. years.

7,000 6,000 50% 7,000 Target 45% 6,000 6,000 40% 5,000 5,000 35% 4,000 30% 4,000 3,000 25% 3,000 China Units 2,000

China China Units 20% 1,000 2,000 15% YOYGrowth % 10% 0 1,000

5% KFC

- 0% Costa

Dunkin'

Popeyes

TacoBell

PizzaHut

Starbucks

McDonald's

BurgerKing

TimHortons

Papa John's

2012 2013 2014 2011 2015 2016 2017 2018

2019E 2020E 2021E 2022E

China Units YOY Growth % Current Target

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 71: We expect CAP unit growth of ~11-11.5% Figure 70: China has represented ~50-55% of total over the next few years with ~55% coming from CAP growth over the last several years. China, relatively in-line with consensus.

25.0% 14.0%

12.0% 20.0% 18.4% 18.1% 18.0% 17.8% 10.0% 16.1% 15.0% 14.1% 8.0% 272 368 394 410 482 6.0% 466 10.0%

CAP Unit CAP Unit Growth 4.0% CAP Unit Growth 2.0% 5.0% 317 444 571 350 554 585 0.0% 0.0% 2013 2014 2015 2016 2017 2018

China CAP excl China CSe China CSe CAP excl China Consensus CAP

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates, Consensus Metrix

Acquisition of East China JV supports confidence in long-term potential Starbucks acquired the remaining 50% of the East China JV in December 2017, transforming China into a 100% company-operated market. We believe this transaction highlights management’s confidence in the growth potential for the brand and provides increased visibility in the path to meet, and potentially exceed, the FY22 target. We expect the fully integrated market should unlock opportunities for synergies and operational efficiencies over time. Over the past couple of years, East China has averaged ~40% unit growth, compared to less than 25% in the rest of Mainland China, pressuring SSS which have lagged Mainland China. Starting in F2Q19, stores in East China were included in the comp base, increasing China’s contribution to ~55% of the overall comp base. SBUX indicated the markets were performing relatively similarly.

Starbucks Corporation (SBUX) 34 25 June 2019

Prior to the integration, royalties, product sales and COGS were reported in CAP and 50% of the JV’s operating income was reflected in the income from equity investment line, inflating operating margin. CAP has previously been identified as having the potential to be the most profitable segment for SBUX. Integration costs weighed on CAP margins in 2018, and 2019 is expected to be relatively flat. We see opportunity for margin expansion in China going forward, and model ~20bps of expansion in 2019 and longer-term.

CAP to represent greater growth contribution CAP currently represents ~20% of overall revenue, up from ~15% over the last several years prior to the East China JV acquisition. We estimate CAP contributes ~35% of revenue growth over the next several years, and ~55% of unit growth contribution. CAP represents ~20% of operating income, which is expected to increase over time.

Figure 72: CAP is expected to represent a greater Figure 73: CAP represents an outsized portion of percentage of overall revenue as CAP growth operating income given its higher company- outpaces consolidated SBUX. operated structure.

30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

CAP % as SBUX Revenue 5% 5% CAP as % SBUX Operating CAP % as SBUX Operating Income

0% 0%

2014 2015 2016 2017 2018

2014 2015 2016 2017 2018

2019E 2020E 2021E 2022E

2020E 2021E 2022E 2019E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 75: We model CAP net unit growth of ~11.5% Figure 74: CAP comprises ~9,000 units, reflecting over the next few years, relatively in-line with average unit growth of ~17% over the last five years. consensus expectations.

9,500 20% 13.0% 19% 12.5% 8,500 18% 12.0% 7,500 17% 11.5% 11.0% 6,500 16% 15% 10.5% 5,500 10.0%

CAP Units 14% CAP Unit CAP Unit Growth 4,500 13% CAP Unit Growth 9.5% 12% 9.0% 3,500 11% 8.5% 2,500 10% 8.0% 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E

Units Unit Growth CSe Consensus

Source: Company data, Credit Suisse estimates Source: Company data, Consensus Metrix, Credit Suisse estimates

CAP SSS have averaged ~4.5% over the last five years, with deceleration more recently largely driven by softness in China. Following challenges in Japan over the last couple of years, Japan SSS turned positive in F2Q18, and momentum appears to have continued with mid-single-digit transaction and SSS growth in F1Q19 and another strong quarter in F2Q19. Going forward though, China will represent a greater ~55% of the comp base (from ~35% previously), making it a more meaningful driver of the overall comp. We estimate CAP SSS of ~2.5% in FY19 and long term, relatively in-line with consensus.

Starbucks Corporation (SBUX) 35 25 June 2019

Figure 76: CAP SSS have averaged ~4.5% over the last five years, with deceleration in recent years driven by challenges in Japan and more recent Figure 77: We model CAP SSS of ~2.5% in FY19 and intensified competition in China. long term, in-line with consensus expectations.

14.0% 4.0% 12.0% 3.5% 10.0% 3.0% 8.0% 2.5% 6.0% 2.0% 4.0%

CAP SSS 1.5% CAP SSS 2.0% 1.0% 0.0% 0.5% -2.0% 0.0%

-4.0%

3Q21E 4Q21E 3Q19E 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E 1Q21E 2Q21E 1Q22E 2Q22E 3Q22E 4Q22E

1Q16 2Q16 3Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19

Traffic Avg Ticket CSe Traffic CSe Avg Ticket Consensus Traffic Consensus Avg Ticket

Source: Company data, Credit Suisse estimates Source: Company data, Consensus Metrix, Credit Suisse estimates

Starbucks Corporation (SBUX) 36 25 June 2019

Valuation $92 Target Price Our $92 target price is based on ~27x our NTM EPS in 12 months, implying an EV/EBITDA multiple of ~18x our NTM EPS in 12 months. Our P/E multiple is in-line with the implied multiple relative to SBUX’s historical premium (5-year 9% historical premium), below SBUX’s current P/E multiple, but in-line with valuation in recent weeks. Our ~18x EV/EBITDA multiple is ~0.5x higher than SBUX’s current multiple and a premium to its five-year average EV/EBITDA multiple of ~14.5x. Peer Group EV/EBITDA Analysis SBUX currently trades at ~17.5x consensus NTM EBITDA estimates, above its five-year average EV/EBITDA multiple of ~14.5x. SBUX has historically traded at a ~5.5% premium to restaurant peers, with its current premium reflecting a ~10.5% premium.

Figure 78: SBUX NTM EV/EBITDA Figure 79: SBUX NTM EV/EBITDA vs Peers

19.0x 19.0x 18.0x 18.0x 17.0x 17.0x 16.0x 16.0x 15.0x 15.0x

14.0x 14.0x EV/EBITDA 13.0x EV/EBITDA 13.0x 12.0x 12.0x 11.0x 11.0x 10.0x 10.0x Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

NTM EV/EBITDA 5-yr Avg +1 Std Dev -1 Std Dev SBUX Peers Implied Multiple on Avg. Premium

Source: FactSet, Credit Suisse estimates Source: FactSet, Credit Suisse estimates Note: Peers include QSR/fast casual restaurant companies.

Peer Group P/E Analysis SBUX currently trades at ~28x consensus NTM EPS estimates, above its five-year average P/E multiple of ~25.5-26x. SBUX has historically traded at a ~9% premium to restaurant peers. At current levels, SBUX is trading at a ~13.5% premium to restaurant peers, with its historical premium implying a P/E multiple of ~27x EPS.

Figure 80: SBUX NTM P/E Figure 81: SBUX NTM P/E vs Peers

36.0x 36.0x 34.0x 34.0x 32.0x 32.0x 30.0x 30.0x 28.0x 28.0x

26.0x 26.0x

P/E P/E 24.0x 24.0x 22.0x 22.0x 20.0x 20.0x 18.0x 18.0x 16.0x 16.0x May-14 May-15 May-16 May-17 May-18 May-19 May-14 May-15 May-16 May-17 May-18 May-19

NTM P/E 5-yr Avg +1 Std Dev -1 Std Dev SBUX Peers Implied Multiple on Avg. Premium

Source: FactSet, Credit Suisse estimates Source: FactSet, Credit Suisse estimates Note: Peers include QSR/fast casual restaurant companies.

Starbucks Corporation (SBUX) 37 25 June 2019

Figure 82: Credit Suisse US Restaurants Coverage

NTM System Sales % Franchised/ NTM P/E % Unit Growth EBITDA Growth EV/EBITDA Growth Licensed

SHAK 28.2x 113.8x 22.2% 22.8% 17.5% 40% CMG 25.6x 53.0x 11.0% 5.9% 22.6% 0% DPZ 20.4x 29.0x 9.7% 6.8% 10.5% 98% YUM 20.1x 28.3x 6.8% 4.1% 7.3% 98% DNKN 18.3x 26.4x 3.5% 1.5% 5.0% 100% MCD 18.0x 24.8x 5.0% 2.1% 4.4% 93% QSR 17.5x 25.5x 6.5% 5.4% 5.8% 100% SBUX 17.4x 29.0x 7.1% 6.9% 7.5% 48% PZZA 15.7x 36.8x 1.3% 2.8% 3.1% 88% WEN 15.0x 30.3x 3.3% 1.9% 5.3% 95% JACK 12.1x 19.1x 2.3% 0.9% 2.6% 94% Average 18.0x 30.2x 5.7% 3.8% 7.4% 81.3%

Source: Company data, FactSet, Consensus Metrix, Credit Suisse Note: (1) FCF, system sales and EBITDA growth calculated based on 3-yr forward CAGR using consensus estimates. (2) % Franchised/ Licensed reflects 2018 franchise mix. (3) Averages exclude SHAK.

Scenario Analysis Blue Sky: $105 One-Year Valuation Our $105 one-year valuation in a blue sky scenario is based on a P/E multiple of ~29x our blue sky FY20 EPS, implying an EV/EBITDA multiple of ~18x. Our blue sky scenario is based on: 1) Americas SSS of 5%; 2) Americas company unit growth of ~5%; and 3) Americas operating margins of ~24% and consolidated operating margin of ~19%. Grey Sky: $70 One-Year Valuation Our $70 one-year valuation in a grey sky scenario is based on a P/E of ~23.5x our grey sky FY20 EPS implying an EV/EBITDA multiple of 15x our FY20 EBITDA. Our grey sky FY20 grey sky scenario is based on: 1) Americas SSS of 2%; 2) Americas unit growth of ~2%; and 3) Americas operating margins of ~21%.

Starbucks Corporation (SBUX) 38 25 June 2019

Investment Risks

■ Competition: SBUX operates in a highly competitive restaurant environment, facing competition from specialty coffee shops offering premium and artisanal products and experiences, large competitors in the US quick service restaurant sector and ready-to- drink beverage market, in addition to well-established companies in many international markets. ■ Food Safety Incidents: Food-borne illness and other food safety events have occurred in the food industry in the past and could occur again in the future. Food safety events, whether or not involving SBUX, could result in negative publicity, may reduce demand for Starbucks’ food, and could result in a decrease in guest traffic and sales.

■ International Exposure: SBUX has business operations in over 70 markets and sources its products from suppliers across the globe. Fluctuations in the value of foreign currencies where SBUX operates or sources its products could adversely affect its revenues and profits. ■ Customer Data Security: SBUX’s rewards program, digital based payment platforms and other information technology systems contain personal customer information. The breach, theft or unauthorized use of customer data could significantly damage SBUX’s reputation, decrease revenue, and increase legal liabilities. ■ Commodity Exposure: SBUX purchases a significant amount of coffee beans, dairy products and other commodities to support the needs of its operations. SBUX’s profitability could be adversely affected if the cost of coffee beans, dairy products or other commodities used in its operations increases due to weather, natural disasters, higher farm production costs and other factors outside its control. ■ Supply Chain Disruption: SBUX relies on its suppliers and third party logistics partners to provide high quality products and comply with applicable laws. Any material interruption in its supply chain as a result of roasting plant casualty losses, third party logistics interruption, trade restrictions, natural disasters or other events could have a negative impact on SBUX’s business and profitability.

Starbucks Corporation (SBUX) 39 25 June 2019

Financials

Figure 83: SBUX Income Statement

Starbucks (SBUX) Fiscal Yr Fiscal Yr 2018 Fiscal Yr 2019 Fiscal Yr 2020 Fiscal Yr Fiscal Yr Fiscal Yr ($ in millions) 2016 2017 1Q18 2Q18 3Q18 4Q18 2018 1Q19 2Q19 3Q19E 4Q19E 2019E 1Q20E 2Q20E 3Q20E 4Q20E 2020E 2021E 2022E 2016 2017 Dec-17 Apr-18 Jul-18 Sep-18 2018 Dec-18 Mar-19 Jun-19 Sep-19 2019E Dec-19 Mar-20 Jun-20 Sep-20 2020E 2021E 2022E Income Statement

Net Revenues Company-operated stores $16,844.2 $17,650.7 $4,741.8 $4,828.0 $5,060.4 $5,060.1 $19,690.3 $5,370.3 $5,159.0 $5,457.4 $5,468.5 $21,455.2 $5,826.4 $5,600.0 $5,922.3 $5,973.4 $23,322.0 $25,684.5 $27,257.3 YOY % 10.8% 4.8% 6.1% 15.1% 12.2% 13.0% 11.6% 13.3% 6.9% 7.8% 8.1% 9.0% 8.5% 8.5% 8.5% 9.2% 8.7% 10.1% 6.1% Licensed stores $2,154.1 $2,355.0 $682.4 $625.6 $660.6 $683.6 $2,652.2 $737.1 $678.2 $718.2 $741.3 $2,874.8 $806.2 $735.9 $774.4 $805.5 $3,122.1 $3,440.1 $3,662.1 YOY % 15.7% 9.3% 13.3% 14.4% 12.3% 10.7% 12.6% 8.0% 8.4% 8.7% 8.4% 8.4% 9.4% 8.5% 7.8% 8.7% 8.6% 10.2% 6.5% CPG, foodservice & other $2,317.6 $2,381.0 $649.5 $578.2 $589.3 $559.9 $2,376.9 $525.3 $468.7 $477.6 $480.7 $1,952.4 $552.2 $492.7 $502.1 $505.3 $2,052.3 $2,171.0 $2,268.4 YOY % 10.2% 2.7% -1.8% 4.8% 4.4% -7.3% -0.2% -19.1% -18.9% -18.9% -14.1% -17.9% 5.1% 5.1% 5.1% 5.1% 5.1% 5.8% 4.5% Total Specialty $4,471.7 $4,736.0 $1,331.9 $1,203.8 $1,249.9 $1,243.5 $5,029.1 $1,262.4 $1,146.9 $1,195.8 $1,222.0 $4,827.1 $1,358.4 $1,228.6 $1,276.5 $1,310.7 $5,174.3 $5,611.1 $5,930.4 YOY % 12.8% 5.9% 5.4% 9.6% 8.5% 1.8% 6.2% -5.2% -4.7% -4.3% -1.7% -4.0% 7.6% 7.1% 6.7% 7.3% 7.2% 8.4% 5.7% Total Net Revenues $21,315.9 $22,386.7 $6,073.7 $6,031.8 $6,310.3 $6,303.6 $24,719.4 $6,632.7 $6,305.9 $6,653.2 $6,690.5 $26,282.3 $7,184.8 $6,828.6 $7,198.8 $7,284.1 $28,496.4 $31,295.6 $33,187.8 YOY % 11.2% 5.0% 5.9% 13.9% 11.5% 10.6% 10.4% 9.2% 4.5% 5.4% 6.1% 6.3% 8.3% 8.3% 8.2% 8.9% 8.4% 9.8% 6.0%

Cost of sales including occupancy costs $8,511.0 $9,023.0 $2,497.3 $2,517.0 $2,553.9 $2,604.6 $10,172.8 $2,758.9 $2,603.8 $2,723.7 $2,779.8 $10,866.2 $2,985.2 $2,819.5 $2,944.6 $3,020.4 $11,769.7 $12,901.9 $13,672.1 YOY % 9.3% 6.0% 8.9% 17.6% 13.6% 11.3% 12.7% 10.5% 3.4% 6.6% 6.7% 6.8% 8.2% 8.3% 8.1% 8.7% 8.3% 9.6% 6.0% % of Total Revenue 39.9% 40.3% 41.1% 41.7% 40.5% 41.3% 41.2% 41.6% 41.3% 40.9% 41.5% 41.3% 41.5% 41.3% 40.9% 41.5% 41.3% 41.2% 41.2% Margin Chg. YOY -71bps 38bps 110bps 130bps 77bps 24bps 85bps 48bps -44bps 47bps 23bps 19bps -5bps 0bps -3bps -8bps -4bps -8bps -3bps

Store operating expenses $6,064.3 $6,489.1 $1,735.5 $1,787.6 $1,823.6 $1,835.1 $7,181.8 $1,988.3 $1,945.8 $1,976.2 $1,991.8 $7,902.1 $2,162.0 $2,114.3 $2,140.2 $2,171.7 $8,588.2 $9,433.3 $9,970.4 YOY % 12.1% 7.0% 6.0% 12.8% 12.0% 11.9% 10.7% 14.6% 8.8% 8.4% 8.5% 10.0% 8.7% 8.7% 8.3% 9.0% 8.7% 9.8% 5.7% % of Retail Revenue 36.0% 36.8% 36.6% 37.0% 36.0% 36.3% 36.5% 37.0% 37.7% 36.2% 36.4% 36.8% 37.1% 37.8% 36.1% 36.4% 36.8% 36.7% 36.6% Margin Chg. YOY 40bps 76bps -3bps -75bps -6bps -36bps -29bps 42bps 69bps 17bps 16bps 36bps 8bps 4bps -7bps -7bps -1bps -10bps -15bps

Other operating expenses $545.4 $500.2 $129.5 $118.0 $127.0 $117.1 $491.6 $88.2 $78.0 $89.4 $95.1 $350.7 $95.8 $83.4 $95.8 $102.3 $377.2 $408.8 $429.5 YOY % 4.4% -8.3% -2.9% -4.1% -1.9% 2.4% -1.7% -31.9% -33.9% -29.6% -18.8% -28.7% 8.6% 6.9% 7.2% 7.5% 7.6% 8.4% 5.1% % of Total Revenue 2.6% 2.2% 2.1% 2.0% 2.0% 1.9% 2.0% 1.3% 1.2% 1.3% 1.4% 1.3% 1.3% 1.2% 1.3% 1.4% 1.3% 1.3% 1.3% Margin Chg. YOY -17bps -32bps -19bps -37bps -27bps -15bps -25bps -80bps -72bps -67bps -44bps -65bps 0bps -2bps -1bps -2bps -1bps -2bps -1bps

Depreciation and amortization expenses $923.4 $962.9 $246.9 $276.1 $274.6 $274.3 $1,071.9 $281.0 $302.2 $293.9 $294.0 $1,171.1 $310.5 $319.8 $319.5 $321.1 $1,270.9 $1,402.0 $1,493.0 YOY % 8.3% 4.3% 4.0% 14.2% 14.2% 12.7% 11.3% 13.8% 9.5% 7.0% 7.2% 9.3% 10.5% 5.8% 8.7% 9.2% 8.5% 10.3% 6.5% % of Total Revenue 4.3% 4.3% 4.1% 4.6% 4.4% 4.4% 4.3% 4.2% 4.8% 4.4% 4.4% 4.5% 4.3% 4.7% 4.4% 4.4% 4.5% 4.5% 4.5% % of Retail Revenue 5.5% 5.5% 5.2% 5.7% 5.4% 5.4% 5.4% 5.2% 5.9% 5.4% 5.4% 5.5% 5.3% 5.7% 5.4% 5.4% 5.4% 5.5% 5.5% Margin Chg. YOY -13bps -3bps -10bps -4bps 9bps -1bps -1bps 3bps 14bps -4bps -4bps 1bps 10bps -15bps 1bps 0bps -1bps 1bps 2bps

General & administrative expenses $1,357.8 $1,390.4 $386.4 $408.7 $432.7 $417.1 $1,644.9 $430.4 $439.6 $440.3 $443.4 $1,753.7 $428.4 $439.1 $439.5 $445.3 $1,752.2 $1,756.9 $1,756.6 YOY % 14.7% 2.4% 4.7% 20.6% 27.8% 21.3% 18.3% 11.4% 7.6% 1.8% 6.3% 6.6% -0.5% -0.1% -0.2% 0.4% -0.1% 0.3% 0.0% % of Total Revenue 6.4% 6.2% 6.4% 6.8% 6.9% 6.6% 6.7% 6.5% 7.0% 6.6% 6.6% 6.7% 6.0% 6.4% 6.1% 6.1% 6.1% 5.6% 5.3% Margin Chg. YOY 19bps -16bps -8bps 38bps 87bps 58bps 44bps 13bps 20bps -24bps 1bps 2bps -53bps -54bps -51bps -51bps -52bps -54bps -32bps

Restructuring and impairments $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Total operating expenses $17,401.9 $18,365.6 $4,995.6 $5,107.4 $5,211.8 $5,248.2 $20,563.0 $5,546.8 $5,369.4 $5,523.5 $5,604.2 $22,043.9 $5,981.8 $5,776.1 $5,939.6 $6,060.7 $23,758.2 $25,902.9 $27,321.6

Income from equity investees $318.2 $391.4 $89.4 $52.7 $71.4 $87.7 $301.2 $67.8 $62.3 $74.7 $91.6 $296.4 $69.9 $64.2 $77.0 $94.3 $305.4 $314.8 $324.5 Operating Income $4,232.2 $4,412.5 $1,167.5 $977.1 $1,169.9 $1,143.1 $4,457.6 $1,153.7 $998.8 $1,204.4 $1,177.9 $4,534.8 $1,272.9 $1,116.7 $1,336.2 $1,317.7 $5,043.6 $5,707.4 $6,190.6 YOY % 15.8% 4.3% 1.8% 2.9% -0.7% 0.4% 1.0% -1.2% 2.2% 2.9% 3.0% 1.7% 10.3% 11.8% 10.9% 11.9% 11.2% 13.2% 8.5% Operating Margin 19.9% 19.7% 19.2% 16.2% 18.5% 18.1% 18.0% 17.4% 15.8% 18.1% 17.6% 17.3% 17.7% 16.4% 18.6% 18.1% 17.7% 18.2% 18.7% Margin Chg. YOY 78bps -14bps -78bps -173bps -227bps -184bps -168bps -183bps -36bps -44bps -53bps -78bps 32bps 51bps 46bps 48bps 44bps 54bps 42bps

Interest income and other, net $108.4 $181.8 $88.2 $35.5 $31.5 $36.2 $191.4 $24.8 $15.2 $15.0 $15.0 $70.0 $25.0 $25.0 $25.0 $25.0 $100.0 $100.0 $100.0 Interest expense ($81.3) ($92.5) ($25.9) ($35.1) ($45.4) ($63.8) ($170.2) ($75.0) ($73.9) ($82.2) ($90.2) ($321.3) ($90.2) ($90.2) ($94.2) ($98.3) ($373.0) ($413.4) ($437.4) Gains from divestures, JVs, etc $0.0 $9.6 $0.3 $0.0 $2.5 $2.9 $5.7 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Total other income $27.1 $98.9 $62.6 $0.4 ($11.4) ($24.7) $26.9 ($50.2) ($58.7) ($67.2) ($75.2) ($251.3) ($65.2) ($65.2) ($69.2) ($73.3) ($273.0) ($313.4) ($337.4)

Pretax Income $4,259.3 $4,511.4 $1,230.1 $977.5 $1,158.5 $1,118.4 $4,484.5 $1,103.5 $940.1 $1,137.2 $1,102.7 $4,283.5 $1,207.7 $1,051.5 $1,266.9 $1,244.4 $4,770.6 $5,394.0 $5,853.2 Pre-Tax Margin 20.0% 20.2% 20.3% 16.2% 18.4% 17.7% 18.1% 16.6% 14.9% 17.1% 16.5% 16.3% 16.8% 15.4% 17.6% 17.1% 16.7% 17.2% 17.6%

Income tax expense $1,404.4 $1,500.5 $296.7 $227.4 $299.8 $283.4 $1,107.3 $167.8 $186.2 $250.2 $242.6 $846.8 $265.7 $231.3 $278.7 $273.8 $1,049.5 $1,186.7 $1,287.7 Tax Rate 33.0% 33.3% 24.1% 23.3% 25.9% 25.3% 24.7% 15.2% 19.8% 22.0% 22.0% 19.8% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0%

Net earnings (loss) attributable to noncontrolling interest $1.2 $0.2 ($0.1) ($0.3) ($0.5) $0.6 ($0.3) ($0.2) ($4.4) $0.0 $0.0 ($4.6) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Discontinued Operations $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net Income $2,854.9 $3,010.9 $933.4 $750.1 $858.7 $835.0 $3,377.2 $935.7 $753.9 $887.0 $860.1 $3,436.6 $942.0 $820.2 $988.2 $970.7 $3,721.1 $4,207.3 $4,565.5 Net Income Margin 13.4% 13.4% 15.4% 12.4% 13.6% 13.2% 13.7% 14.1% 12.0% 13.3% 12.9% 13.1% 13.1% 12.0% 13.7% 13.3% 13.1% 13.4% 13.8%

Adj EPS $1.92 $2.06 $0.65 $0.53 $0.62 $0.62 $2.42 $0.75 $0.60 $0.73 $0.71 $2.79 $0.78 $0.69 $0.84 $0.84 $3.15 $3.70 $4.15 YOY % 21.9% 7.3% 25.8% 18.0% 13.3% 13.4% 17.5% 14.7% 13.0% 17.8% 14.4% 15.0% 5.1% 14.5% 15.5% 17.9% 13.1% 17.3% 12.2%

Weighted Average Basic Shares 1,471.6 1,449.5 1,421.0 1,394.9 1,377.1 1,336.8 1,382.7 1,242.0 1,239.2 1,206.3 1,202.4 1,222.5 1,189.5 1,176.6 1,163.7 1,150.8 1,170.1 1,127.0 1,089.6 YOY % -1.8% -1.5% -2.5% -4.0% -4.9% -7.1% -4.6% -12.6% -11.2% -12.4% -10.1% -11.6% -4.2% -5.1% -3.5% -4.3% -4.3% -3.7% -3.3% Weighted Average Diluted Shares 1,486.7 1,461.5 1,434.6 1,406.6 1,388.5 1,348.7 1,394.6 1,253.4 1,250.7 1,217.8 1,213.9 1,233.9 1,200.9 1,188.0 1,175.1 1,162.2 1,181.6 1,138.5 1,101.0 YOY % -1.9% -1.7% -2.4% -4.0% -4.9% -7.1% -4.6% -12.6% -11.1% -12.3% -10.0% -11.5% -4.2% -5.0% -3.5% -4.3% -4.2% -3.6% -3.3%

Cash Dividends per Share $0.85 $1.05 $0.30 $0.30 $0.36 $0.36 $1.32 $0.36 $0.36 $0.36 $0.40 $1.48 $0.40 $0.40 $0.40 $0.45 $1.63 $1.84 $2.07 YOY % 25.0% 23.5% 20.0% 20.0% 44.0% 20.0% 25.7% 20.0% 20.0% 0.0% 10.0% 11.8% 10.0% 10.0% 10.0% 12.5% 10.7% 12.5% 12.5% Payout Ratio 44.3% 51.0% 46.1% 56.3% 58.2% 58.1% 54.5% 48.2% 59.7% 49.4% 55.9% 53.0% 50.5% 57.4% 47.1% 53.3% 51.9% 49.7% 49.9%

EBITDA

Operating Income $4,232.2 $4,412.5 $1,167.5 $977.1 $1,169.9 $1,143.1 $4,457.6 $1,153.7 $998.8 $1,204.4 $1,177.9 $4,534.8 $1,272.9 $1,116.7 $1,336.2 $1,317.7 $5,043.6 $5,707.4 $6,190.6 Depreciation $923.4 $962.9 $246.9 $276.1 $274.6 $274.3 $1,071.9 $281.0 $302.2 $293.9 $294.0 $1,171.1 $310.5 $319.8 $319.5 $321.1 $1,270.9 $1,402.0 $1,493.0 EBITDA $5,155.6 $5,375.4 $1,414.4 $1,253.2 $1,444.5 $1,417.4 $5,529.5 $1,434.7 $1,301.0 $1,498.3 $1,472.0 $5,706.0 $1,583.4 $1,436.6 $1,655.6 $1,638.8 $6,314.4 $7,109.4 $7,683.6 YOY % 14.4% 4.3% 2.2% 5.2% 1.8% 2.6% 2.9% 1.4% 3.8% 3.7% 3.8% 3.2% 10.4% 10.4% 10.5% 11.3% 10.7% 12.6% 8.1% EBITDA Margin 24.2% 24.0% 23.3% 20.8% 22.9% 22.5% 22.4% 21.6% 20.6% 22.5% 22.0% 21.7% 22.0% 21.0% 23.0% 22.5% 22.2% 22.7% 23.2% Margin Chg. YOY 66bps -18bps -85bps -172bps -217bps -176bps -164bps -166bps -15bps -37bps -48bps -66bps 41bps 41bps 48bps 50bps 45bps 56bps 43bps Source: Company data, Credit Suisse estimates

Starbucks Corporation (SBUX) 40 25 June 2019

Figure 84: SBUX Balance Sheet

Starbucks (SBUX) Fiscal Yr Fiscal Yr 2018 Fiscal Yr 2019 Fiscal Yr 2020 Fiscal Yr Fiscal Yr Fiscal Yr ($ in millions) 2016 2017 1Q18 2Q18 3Q18 4Q18 2018 1Q19 2Q19 3Q19E 4Q19E 2019E 1Q20E 2Q20E 3Q20E 4Q20E 2020E 2021E 2022E 2016 2017 Dec-17 Apr-18 Jul-18 Sep-18 2018 Dec-18 Mar-19 Jun-19 Sep-19 2019E Dec-19 Mar-20 Jun-20 Sep-20 2020E 2021E 2022E Balance Sheet Cash and cash equivalents $2,128.8 $2,462.3 $3,661.4 $2,142.0 $9,042.1 $8,756.3 $8,756.3 $4,761.6 $2,055.1 $1,512.2 $1,676.2 $1,676.2 $1,237.9 $662.3 $778.6 $475.8 $475.8 $800.5 $1,451.3 Short-term investments $134.4 $228.6 $106.6 $100.5 $84.5 $181.5 $181.5 $230.2 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 Accounts receivable, net $768.8 $870.4 $851.8 $869.6 $854.8 $693.1 $693.1 $721.4 $703.6 $925.9 $822.9 $822.9 $750.8 $762.8 $997.7 $892.2 $892.2 $979.8 $1,039.1 Inventories $1,378.5 $1,364.0 $1,313.2 $1,375.9 $1,387.4 $1,400.5 $1,400.5 $1,354.6 $1,443.0 $1,443.0 $1,443.0 $1,443.0 $1,443.0 $1,443.0 $1,443.0 $1,443.0 $1,443.0 $1,443.0 $1,443.0 Deferred income taxes, net $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Prepaid expenses and other current assets $350.0 $358.1 $950.5 $1,169.0 $1,360.6 $1,462.8 $1,462.8 $608.5 $674.0 $674.0 $674.0 $674.0 $674.0 $674.0 $674.0 $674.0 $674.0 $674.0 $674.0 Total Current Assets $4,760.5 $5,283.4 $6,883.5 $5,657.0 $12,729.4 $12,494.2 $12,494.2 $7,676.3 $4,952.3 $4,631.7 $4,692.6 $4,692.6 $4,182.3 $3,618.7 $3,969.9 $3,561.6 $3,561.6 $3,973.9 $4,683.9

Long-term investments $1,141.7 $542.3 $363.5 $293.1 $261.4 $267.7 $267.7 $265.0 $251.9 $251.9 $251.9 $251.9 $251.9 $251.9 $251.9 $251.9 $251.9 $251.9 $251.9 Equity and cost investments $354.5 $481.6 $287.6 $297.6 $323.4 $334.7 $334.7 $336.1 $309.3 $309.3 $309.3 $309.3 $309.3 $309.3 $309.3 $309.3 $309.3 $309.3 $309.3 Property, plant & equipment, net $4,533.8 $4,919.5 $5,378.7 $5,576.8 $5,686.1 $5,929.1 $5,929.1 $6,039.3 $6,135.5 $6,391.6 $6,697.6 $6,697.6 $6,887.1 $7,067.2 $7,247.8 $7,426.7 $7,426.7 $8,024.6 $8,531.6 Deferred income taxes, net $885.4 $795.4 $157.9 $165.3 $149.1 $134.7 $134.7 $650.0 $1,006.6 $1,006.6 $1,006.6 $1,006.6 $1,006.6 $1,006.6 $1,006.6 $1,006.6 $1,006.6 $1,006.6 $1,006.6 Other long-term assets $417.7 $362.8 $526.3 $541.8 $404.7 $412.2 $412.2 $472.7 $464.5 $464.5 $464.5 $464.5 $464.5 $464.5 $464.5 $464.5 $464.5 $464.5 $464.5 Other intangible assets $516.3 $441.4 $1,246.2 $1,228.4 $1,122.9 $1,042.2 $1,042.2 $981.6 $918.3 $918.3 $918.3 $918.3 $918.3 $918.3 $918.3 $918.3 $918.3 $918.3 $918.3 Goodwill $1,719.6 $1,539.2 $3,674.8 $3,793.5 $3,647.6 $3,541.6 $3,541.6 $3,560.3 $3,603.5 $3,603.5 $3,603.5 $3,603.5 $3,603.5 $3,603.5 $3,603.5 $3,603.5 $3,603.5 $3,603.5 $3,603.5 Total Assets $14,329.5 $14,365.6 $18,518.5 $17,553.5 $24,324.6 $24,156.4 $24,156.4 $19,981.3 $17,641.9 $17,577.4 $17,944.3 $17,944.3 $17,623.5 $17,240.1 $17,771.7 $17,542.4 $17,542.4 $18,552.6 $19,769.7

Accounts payable $730.6 $782.5 $852.1 $869.7 $921.1 $1,179.3 $1,179.3 $1,100.5 $1,096.7 $966.1 $1,121.8 $1,121.8 $1,211.8 $1,180.8 $1,041.8 $1,215.1 $1,215.1 $1,331.9 $1,411.5 Accrued expenses $1,493.2 $1,556.6 $3,161.2 $1,753.7 $1,913.4 $1,847.6 $1,847.6 $1,608.4 $1,593.4 $1,593.4 $1,593.4 $1,593.4 $1,593.4 $1,593.4 $1,593.4 $1,593.4 $1,593.4 $1,593.4 $1,593.4 Accrued occupancy costs $137.5 $151.3 $178.4 $177.8 $168.9 $164.2 $164.2 $181.9 $190.7 $190.7 $190.7 $190.7 $190.7 $190.7 $190.7 $190.7 $190.7 $190.7 $190.7 Accrued taxes $368.4 $226.6 $421.5 $330.1 $280.1 $286.6 $286.6 $773.7 $785.2 $785.2 $785.2 $785.2 $785.2 $785.2 $785.2 $785.2 $785.2 $785.2 $785.2 Insurance reserves & other accrued liabilities $246.0 $215.2 $210.0 $222.0 $215.4 $213.7 $213.7 $208.8 $221.0 $221.0 $221.0 $221.0 $221.0 $221.0 $221.0 $221.0 $221.0 $221.0 $221.0 Stored value card liability $1,171.2 $1,288.5 $1,668.0 $1,484.0 $1,444.6 $1,288.8 $1,288.8 $1,200.1 $957.3 $957.3 $957.3 $957.3 $957.3 $957.3 $957.3 $957.3 $957.3 $957.3 $957.3 Deferred Revenue $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 $354.1 Short term borrowings $0.0 $0.0 $0.0 $0.0 $300.0 $0.0 $0.0 $0.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 Current portion of long-term debt $400.0 $0.0 $349.9 $349.7 $349.8 $349.9 $349.9 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Total Current Liabilities $4,546.9 $4,220.7 $6,841.1 $5,187.0 $5,947.4 $5,684.2 $5,684.2 $5,427.5 $5,273.4 $5,142.8 $5,298.5 $5,298.5 $5,388.5 $5,357.5 $5,218.5 $5,391.8 $5,391.8 $5,508.6 $5,588.2

Deferred Tax $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Long-term debt $3,202.2 $3,932.6 $4,566.5 $6,185.1 $6,149.1 $9,090.2 $9,090.2 $9,130.7 $9,141.5 $11,124.2 $11,124.2 $11,124.2 $11,124.2 $11,124.2 $12,124.2 $12,124.2 $12,124.2 $13,124.2 $14,124.2 Deferred Revenue $6,788.4 $6,775.7 $6,775.7 $6,823.7 $6,761.9 $6,717.3 $6,672.6 $6,672.6 $6,628.0 $6,583.3 $6,538.7 $6,494.1 $6,494.1 $6,315.5 $6,136.9 Other long-term liabilities $689.7 $755.3 $1,352.0 $1,463.7 $1,484.7 $1,430.5 $1,430.5 $1,478.2 $1,500.3 $1,500.3 $1,500.3 $1,500.3 $1,500.3 $1,500.3 $1,500.3 $1,500.3 $1,500.3 $1,500.3 $1,500.3 Total Liabilities $8,438.8 $8,908.6 $12,759.6 $12,835.8 $20,369.6 $22,980.6 $22,980.6 $22,860.1 $22,677.1 $24,484.6 $24,595.6 $24,595.6 $24,641.0 $24,565.3 $25,381.7 $25,510.3 $25,510.3 $26,448.7 $27,349.6 $13 Common Stock $1.5 $1.4 $1.4 $1.4 $1.4 $1.3 $1.3 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 $1.2 Additional Paid in Capital $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 $41.1 Retained Earnings $5,949.8 $5,563.2 $5,834.9 $4,635.8 $4,109.2 $1,457.4 $1,457.4 ($2,584.0) ($4,807.7) ($6,679.6) ($6,423.8) ($6,423.8) ($6,790.0) ($7,097.8) ($7,382.5) ($7,740.5) ($7,740.5) ($7,668.5) ($7,352.4) Accumulated other comprehensive income/loss & NCI($101.7) ($148.7) ($118.5) $39.4 ($196.7) ($324.0) ($324.0) ($337.1) ($269.8) ($269.8) ($269.8) ($269.8) ($269.8) ($269.8) ($269.8) ($269.8) ($269.8) ($269.8) ($269.8) Shareholders' Equity $5,890.7 $5,457.0 $5,758.9 $4,717.7 $3,955.0 $1,175.8 $1,175.8 ($2,878.8) ($5,035.2) ($6,907.1) ($6,651.3) ($6,651.3) ($7,017.5) ($7,325.3) ($7,610.0) ($7,968.0) ($7,968.0) ($7,896.0) ($7,579.9)

Total Liabilities & Shareholders' Equity $14,329.5 $14,365.6 $18,518.5 $17,553.5 $24,324.6 $24,156.4 $24,156.4 $19,981.3 $17,641.9 $17,577.4 $17,944.3 $17,944.3 $17,623.5 $17,240.1 $17,771.7 $17,542.4 $17,542.4 $18,552.6 $19,769.7 check ------

Balance Sheet Analysis 2016 2017 1Q18 2Q18 3Q18 4Q18 2018 1Q19 2Q19 3Q19E 4Q19E 2019E 1Q20E 2Q20E 3Q20E 4Q20E 2020E 2021E 2022E Debt Analysis Long-term debt $3,202.2 $3,932.6 $4,566.5 $6,185.1 $6,149.1 $9,090.2 $9,090.2 $9,130.7 $9,141.5 $11,124.2 $11,124.2 $11,124.2 $11,124.2 $11,124.2 $12,124.2 $12,124.2 $12,124.2 $13,124.2 $14,124.2 Current portion of long-term debt $400.0 $0.0 $349.9 $349.7 $349.8 $349.9 $349.9 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Short-term borrowings $0.0 $0.0 $0.0 $0.0 $300.0 $0.0 $0.0 $0.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 $75.0 Total Debt $3,602.2 $3,932.6 $4,916.4 $6,534.8 $6,798.9 $9,440.1 $9,440.1 $9,130.7 $9,216.5 $11,199.2 $11,199.2 $11,199.2 $11,199.2 $11,199.2 $12,199.2 $12,199.2 $12,199.2 $13,199.2 $14,199.2

Less: Cash and cash equivalents $2,128.8 $2,462.3 $3,661.4 $2,142.0 $9,042.1 $8,756.3 $8,756.3 $4,761.6 $2,055.1 $1,512.2 $1,676.2 $1,676.2 $1,237.9 $662.3 $778.6 $475.8 $475.8 $800.5 $1,451.3 Less: Short term investments $134.4 $228.6 $106.6 $100.5 $84.5 $181.5 $181.5 $230.2 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 $76.6 Net Debt $1,339.0 $1,241.7 $1,148.4 $4,292.3 ($2,327.7) $502.3 $502.3 $4,138.9 $7,084.8 $9,610.4 $9,446.5 $9,446.5 $9,884.7 $10,460.3 $11,344.0 $11,646.9 $11,646.9 $12,322.2 $12,671.4

Average Total Debt $2,974.9 $3,767.4 $4,424.5 $5,725.6 $6,666.9 $8,119.5 $6,686.4 $9,285.4 $9,173.6 $10,207.9 $11,199.2 $10,319.7 $11,199.2 $11,199.2 $11,699.2 $12,199.2 $11,699.2 $12,699.2 $13,699.2 TTM EBITDA $5,155.6 $5,375.4 $5,405.9 $5,468.1 $5,493.7 $5,529.5 $5,529.5 $5,549.8 $5,597.6 $5,651.4 $5,706.0 $5,706.0 $5,854.7 $5,990.3 $6,147.6 $6,314.4 $6,314.4 $7,109.4 $7,683.6 NTM EBITDA $5,375.4 $5,529.5 $5,549.8 $5,597.6 $5,651.4 $5,706.0 $5,706.0 $5,854.7 $5,990.3 $6,147.6 $6,314.4 $6,314.4 $6,484.5 $6,643.3 $6,822.8 $7,109.4 $7,109.4 $7,683.6 $8,380.6 Total Debt/TTM EBITDA 0.7x 0.7x 0.9x 1.2x 1.2x 1.7x 1.7x 1.6x 1.6x 2.0x 2.0x 2.0x 1.9x 1.9x 2.0x 1.9x 1.9x 1.9x 1.8x Net Debt/TTM EBITDA 0.3x 0.2x 0.2x 0.8x -0.4x 0.1x 0.1x 0.7x 1.3x 1.7x 1.7x 1.7x 1.7x 1.7x 1.8x 1.8x 1.8x 1.7x 1.6x Source: Company data, Credit Suisse estimates

Starbucks Corporation (SBUX) 41 25 June 2019

Figure 85: SBUX Statement of Cash Flows

Starbucks (SBUX) Fiscal Yr Fiscal Yr 2018 Fiscal Yr 2019 Fiscal Yr 2020 Fiscal Yr Fiscal Yr Fiscal Yr ($ in millions) 2016 2017 1Q18 2Q18 3Q18 4Q18 2018 1Q19 2Q19 3Q19E 4Q19E 2019E 1Q20E 2Q20E 3Q20E 4Q20E 2020E 2021E 2022E 2016 2017 Dec-17 Apr-18 Jul-18 Sep-18 2018 Dec-18 Mar-19 Jun-19 Sep-19 2019E Dec-19 Mar-20 Jun-20 Sep-20 2020E 2021E 2022E Cash Flow Statement Operating Cash Flows Net income $2,818.9 $2,884.9 $2,250.1 $659.8 $852.0 $756.4 $4,518.3 $760.4 $658.6 $887.0 $860.1 $3,166.1 $942.0 $820.2 $988.2 $970.7 $3,721.1 $4,207.3 $4,565.5 Cumulative effect of acct change for FIN 47, net of taxes $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Depreciation and amortization $1,030.1 $1,067.1 $272.4 $345.2 $343.9 $344.4 $1,305.9 $350.8 $372.7 $293.9 $294.0 $1,311.4 $310.5 $319.8 $319.5 $321.1 $1,270.9 $1,402.0 $1,493.0 Provision for impairments and asset disposals $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Deferred income taxes, net $265.7 $95.1 $744.8 ($12.2) $31.1 ($48.8) $714.9 ($354.6) ($359.9) $0.0 $0.0 ($714.5) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Equity in income of investees ($250.2) ($310.2) ($66.2) ($41.2) ($59.8) ($75.6) ($242.8) ($55.0) ($53.2) $0.0 $0.0 ($108.2) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Distributions of income from equity investees $223.3 $186.6 $81.3 $63.0 $27.4 $55.1 $226.8 $63.7 $29.6 $0.0 $0.0 $93.3 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Gain on sale of equity in JV and retail operations ($6.1) ($93.5) ($1,827.5) ($42.7) $493.8 $0.0 ($1,376.4) $0.0 ($21.0) $0.0 $0.0 ($21.0) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Litigation charge $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Stock-based compensation $218.1 $176.0 $61.4 $55.1 $68.5 $65.3 $250.3 $97.3 $94.8 $75.4 $71.8 $339.3 $107.0 $104.3 $82.9 $79.0 $373.2 $410.5 $451.6 Tax benefit - stock options $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Excess tax benefit from exercise of stock options ($122.8) ($77.5) $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 $0.0 $0.0 $0.0 $0.0 Other $45.1 $156.1 $3.3 $26.5 ($470.9) $68.5 ($372.6) $6.1 $90.4 $0.0 $0.0 $96.5 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Changes in working capital: Accounts receivable ($55.6) ($96.8) $1.3 $3.9 ($20.1) $145.9 $131.0 ($28.8) $38.6 ($222.3) $103.0 ($109.5) $72.1 ($12.0) ($234.8) $105.5 ($69.3) ($87.6) ($59.2) Inventories ($67.5) $14.0 $71.2 ($60.9) ($31.8) ($19.7) ($41.2) $44.8 ($95.8) $0.0 $0.0 ($51.0) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Accounts payable $46.9 $46.4 $28.1 ($2.6) $46.9 $319.2 $391.6 ($21.3) ($62.1) ($130.6) $155.7 ($58.3) $90.0 ($31.0) ($139.0) $173.3 $93.3 $116.9 $79.5 Accrued taxes $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Deferred revenue $180.4 $130.8 $359.6 ($195.9) ($26.0) $6,971.7 $7,109.4 $362.7 ($353.3) ($44.6) ($44.6) ($79.9) ($44.6) ($44.6) ($44.6) ($44.6) ($178.6) ($178.6) ($178.6) Other operating assets & liabilities $248.8 ($4.7) ($145.8) ($343.5) ($39.1) ($149.0) ($677.4) $1,152.9 $51.0 $0.0 $0.0 $1,203.9 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net Operating Cash Flows $4,575.1 $4,174.3 $1,834.0 $454.5 $1,215.9 $8,433.4 $11,937.8 $2,379.0 $390.4 $858.7 $1,440.1 $5,068.1 $1,477.0 $1,156.6 $972.1 $1,604.8 $5,210.5 $5,870.6 $6,351.8 Year-to-date $1,834.0 $2,288.5 $3,504.4 $11,937.8 $2,379.0 $2,769.4 $3,628.1 $5,068.1 $1,477.0 $2,633.6 $3,605.7 $5,210.5

Investing Cash Flows Purchase of investments ($1,585.7) ($674.4) ($35.2) ($16.8) ($17.5) ($122.4) ($191.9) ($108.7) ($41.5) $0.0 $0.0 ($150.2) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Sales of investments $680.7 $1,054.5 $316.1 $72.6 $52.5 $17.8 $459.0 $32.1 $186.2 $0.0 $0.0 $218.3 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Maturities and calls of investments $27.9 $149.6 $21.3 $5.2 $14.1 $4.7 $45.3 $14.2 $40.9 $0.0 $0.0 $55.1 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Additions to property, plant and equipment, net ($1,440.3) ($1,519.4) ($429.3) ($467.4) ($511.1) ($568.6) ($1,976.4) ($431.4) ($414.2) ($550.0) ($600.0) ($1,995.6) ($500.0) ($500.0) ($500.0) ($500.0) ($2,000.0) ($2,000.0) ($2,000.0) Acquisitions, net of cash acquired $0.0 $0.0 $0.0 ($1,311.3) $0.0 $0.0 ($1,311.3) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net purchases of equity, other investments and other assets $0.0 $0.0 $129.5 $478.7 $0.0 ($608.2) $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 Proceeds from sale of property, plant and equipment $69.6 $85.4 $397.1 ($397.1) $608.2 $0.0 $608.2 $0.0 $48.5 $0.0 $0.0 $48.5 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Other $24.9 $54.3 ($4.5) $2.2 $4.2 $3.7 $5.6 ($16.6) ($20.5) $0.0 $0.0 ($37.1) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net Investing Cash Flows ($2,222.9) ($850.0) $395.0 ($1,633.9) $150.4 ($1,273.0) ($2,361.5) ($510.4) ($200.6) ($550.0) ($600.0) ($1,861.0) ($500.0) ($500.0) ($500.0) ($500.0) ($2,000.0) ($2,000.0) ($2,000.0) Year-to-date $395.0 ($1,238.9) ($1,088.5) ($2,361.5) ($510.4) ($711.0) ($1,261.0) ($1,861.0) ($500.0) ($1,000.0) ($1,500.0) ($2,000.0)

Financing Cash Flows Net issuances/(repayments) of commercial paper $0.0 $0.0 $0.0 $0.0 $300.0 ($300.0) $0.0 $0.0 $75.0 $0.0 $0.0 $75.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Proceeds from issuance of long-term debt $1,254.5 $750.2 $998.3 $1,598.2 $0.0 $2,987.6 $5,584.1 $0.0 $0.0 $1,982.7 $0.0 $1,982.7 $0.0 $0.0 $1,000.0 $0.0 $1,000.0 $1,000.0 $1,000.0 Principal payments on long-term debt $0.0 ($400.0) $0.0 $0.0 $0.0 $0.0 $0.0 ($350.0) $0.0 $0.0 $0.0 ($350.0) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Proceeds from issuance of common stock $160.7 $150.8 $54.3 $52.0 $25.6 $22.0 $153.9 $108.4 $167.3 $100.0 $100.0 $475.7 $113.8 $175.7 $105.0 $105.0 $499.5 $524.5 $550.7 Cash dividends paid ($1,178.0) ($1,450.4) ($428.1) ($419.8) ($412.3) ($483.2) ($1,743.4) ($446.7) ($447.8) ($434.3) ($476.1) ($1,804.9) ($471.0) ($465.9) ($460.8) ($512.7) ($1,910.4) ($2,070.4) ($2,251.7) Repurchase of common stock ($1,995.6) ($2,042.5) ($1,601.0) ($1,591.1) ($869.8) ($3,071.6) ($7,133.5) ($5,114.7) ($2,713.2) ($2,500.0) ($300.0) ($10,627.9) ($1,000.0) ($1,000.0) ($1,000.0) ($1,000.0) ($4,000.0) ($3,000.0) ($3,000.0) Net borrowings/(repayments) under revolving credit facility $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Purchase of noncontrolling interest $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 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Excess tax benefit from exercise of stock options $122.8 $77.5 ($56.0) $56.0 $0.0 $0.0 $0.0 ($55.3) $55.3 $0.0 $0.0 $0.0 ($58.1) $58.1 $0.0 $0.0 $0.0 $0.0 $0.0 Other ($114.4) ($87.2) ($7.2) ($68.1) $1.3 ($29.9) ($103.9) ($0.3) ($55.9) $0.0 $0.0 ($56.2) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Net Financing Cash Flows ($1,750.0) ($3,001.6) ($1,039.7) ($372.8) ($955.2) ($875.1) ($3,242.8) ($5,858.6) ($2,919.3) ($851.5) ($676.1) ($10,305.6) ($1,415.3) ($1,232.2) ($355.8) ($1,407.7) ($4,410.9) ($3,545.9) ($3,701.0) Year-to-date ($1,039.7) ($1,412.5) ($2,367.7) ($3,242.8) ($5,858.6) ($8,777.9) ($9,629.4) ($10,305.6) ($1,415.3) ($2,647.5) ($3,003.3) ($4,410.9) Effect of exchange rates ($3.5) $10.8 $9.8 $32.8 ($52.8) ($29.3) ($39.5) ($4.7) $23.0 $0.0 $0.0 $18.3 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Change in cash and equivalents $598.7 $333.5 $1,199.1 ($1,519.4) $358.3 $6,256.0 $6,294.0 ($3,994.7) ($2,706.5) ($542.9) $163.9 ($7,080.1) ($438.3) ($575.6) $116.3 ($302.8) ($1,200.4) $324.7 $650.8 Cash at beginning of period $1,530.1 $2,128.8 $2,462.3 $3,661.4 $2,142.0 $2,500.3 $2,462.3 $8,756.3 $4,761.6 $2,055.1 $1,512.2 $8,756.3 $1,676.2 $1,237.9 $662.3 $778.6 $1,676.2 $475.8 $800.5 Cash at end of period $2,128.8 $2,462.3 $3,661.4 $2,142.0 $2,500.3 $8,756.3 $8,756.3 $4,761.6 $2,055.1 $1,512.2 $1,676.2 $1,676.2 $1,237.9 $662.3 $778.6 $475.8 $475.8 $800.5 $1,451.3

Cash on Balance Sheet $2,128.8 $2,462.3 $3,661.4 $2,142.0 $9,042.1 $8,756.3 $8,756.3 $4,761.6 $2,055.1 $1,512.2 $1,676.2 $1,676.2 $1,237.9 $662.3 $778.6 $475.8 $475.8 $800.5 $1,451.3 Difference ------0 - -

Free Cash Flow 2016 2017 1Q18 2Q18 3Q18 4Q18 2018 1Q19 2Q19 3Q19E 4Q19E 2019E 1Q20E 2Q20E 3Q20E 4Q20E 2020E 2021E 2022E Operating Cash Flow $4,575.1 $4,174.3 $1,834.0 $454.5 $1,215.9 $8,433.4 $11,937.8 $2,379.0 $390.4 $858.7 $1,440.1 $5,068.1 $1,477.0 $1,156.6 $972.1 $1,604.8 $5,210.5 $5,870.6 $6,351.8 Less: Capex ($1,440.3) ($1,519.4) ($429.3) ($467.4) ($511.1) ($568.6) ($1,976.4) ($431.4) ($414.2) ($550.0) ($600.0) ($1,995.6) ($500.0) ($500.0) ($500.0) ($500.0) ($2,000.0) ($2,000.0) ($2,000.0) Free Cash Flow $3,134.8 $2,654.9 $1,404.7 ($12.9) $704.8 $7,864.8 $9,961.4 $1,947.6 ($23.8) $308.7 $840.1 $3,072.5 $977.0 $656.6 $472.1 $1,104.8 $3,210.5 $3,870.6 $4,351.8 FCF/Share $2.11 $1.82 $0.98 ($0.01) $0.51 $5.83 $7.14 $1.55 ($0.02) $0.25 $0.69 $2.49 $0.81 $0.55 $0.40 $0.95 $2.72 $3.40 $3.95 Source: Company data, Credit Suisse estimates

Starbucks Corporation (SBUX) 42 25 June 2019

Credit Suisse HOLT® Analysis SBUX's current price implies expectations of 5.7 % sales growth. SBUX’s valuation is more sensitive to top-line growth, with every 100bps adding ~$15 per share, and every 100bps of EBITDA margin adding ~$5 per share.

Figure 86: HOLT Market Implied Scenario

STARBUCKS CORP (SBUX) Illustrative "What's Priced In" Assumptions Valuation Sensitivity Analysis at Current Share Price of $84

EBITDA Margin (%) Long-Term Sales growth 2019-2029 based on CS Research, then assumed constant CS Research -200 bps -100 bps 0 bps +100 bps +200 bps 40 35 3.7% 4.7% 5.7% 6.7% 7.7% 30 25 22.7 22.7 20.6 -200 bps 20.7% $53 $63 $75 $89 $107 20 15 10 -100 bps 21.7% $57 $67 $79 $95 $114 5 0 0 bps 22.7% $60 $71 $84 $100 $120 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Historical margins Forecast Historical median

+100 bps 23.7% $64 $75 $89 $105 $126 Long-Term EBITDA Margin Sales Growth (%) +200 bps 24.7% $68 $79 $93 $111 $132 2019 -2022 based on CS Research, then solved long term sales growth required to get to current price CS Research 15 > 10% Within > 10% 10 downside 10% upside 6.4 6.0 5.7 5 SBUX's valuation is more sensitive to top line growth with every 0 100bps increment adding ~15 per share vs. ~$5 per share (5) added for 100bps incremental margins (10) 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Historical sales growth Market implied Historical median Assumptions and Methodology - EBITDA margins: 2019-2029 based on CS Research, then assumed constant Asset Turns (x): Sales/ Invested Capital - Sales growth: 2019-2022 based on CS Research; then solved for the 1.2 1.1 1.1 sales CAGR required to get to the current price

1.0 0.9 - After the 10-year explicit forecast, the HOLT methodology calculates the terminal value by fading returns on capital and growth towards cost 0.8 of capital and GDP growth respectively HOLT market implied scenario 0.6 - For this analysis, we have made two adjustments consistently across

0.4 our coverage: first, we are using the US Country discount rate (3.83%) for all companies and second, we have adjusted the final fade 0.2 rate from 10% to 5% to account for the sector's longer sustainability 0.0 of returns on capital 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Historical asset turns Forecast Historical median

CFROI (%) Asset Growth (%) 30 26.1 26.1 17 25 20.0 12 20 7 3.8 15 2 0.3 (3) 10 (8) 5 (13) 0 (18) (15.3) 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Historical CFROI Forecast CFROI Discount rate Historical median Historical asset growth rate Forecast asset growth

Source: Credit Suisse HOLT®. CFROI and HOLT are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. Source: Credit Suisse HOLT

Starbucks Corporation (SBUX) 43 25 June 2019

Company Overview Starbucks Corporation (SBUX) is the premier roaster, marketer and retailer of specialty coffee globally. Starbucks sells handcrafted coffee, tea and other beverages and a variety of food items through company-operated stores. Starbucks also sells a variety of coffee and tea products and licenses its trademarks through other channels including licensed stores, grocery and foodservice accounts. In addition to the Starbucks Coffee brand, SBUX also sells its good and services under the following brands: Teavana, Seattle’s Best Coffee, Evolution Fresh, La Boulange, Ethos, Starbucks Reserve and Princi. Starbucks is ~52% company-operated and ~48% licensed, with 29,865 stores globally as of the end of F1Q19 (CY2018), including 17,644 in the Americas, 3,421 in EMEA, 8,789 in CAP and 11 alternative store formats (Roastery, Reserve, Princi). Starbucks operates under the following segments: 1) Americas (US, Canada, Latin America); 2) China/Asia Pacific (CAP); 3) Europe, Middle East and Africa (EMEA) and 4) Channel Development; and 5) Corporate and Other (primarily Siren Retail and unallocated P&L items). The Americas segment generates 68% of total revenue, CAP with 18%, EMEA with 4%, Channel Development with 9% and Corporate and Other with 1%. In 2018, Starbucks generated ~$25BN in total revenue. Total system sales were an estimated ~$36BN, including ~$26BN in Americas.

Figure 87: SBUX Revenue by Segment Figure 88: SBUX Revenue Composition FY18

$30,000 Channel Corporate & Development Other $25,000 9% 1%

$20,000 CAP $15,000 18%

$10,000 Revenue Revenue ($MM) EMEA $5,000 4% Americas 68% $0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Americas EMEA CAP Channel Development Corporate & Other

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 89: SBUX Units by Segment Figure 90: SBUX Unit Composition FY18

35,000 Corporate & Other 30,000 0% 25,000 CAP 29% 20,000

Units 15,000

10,000 Americas 5,000 60% EMEA 0 11% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Americas EMEA CAP Corporate & Other

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Starbucks Corporation (SBUX) 44 25 June 2019

Figure 91: SBUX Operating Profit by Segment Figure 92: SBUX Operating Profit Composition FY18

$7,000

$6,000 Channel Development $5,000 17%

$4,000

$3,000 CAP $2,000 19%

Operating Operating Profit ($MM) Americas $1,000 62% EMEA $0 2% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Americas EMEA CAP Channel Development

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Note: Excludes corporate & unallocated. Note: Excludes corporate & unallocated.

Properties SBUX owns most of its roasting facilities and lease the majority of its warehouse and distribution locations. Almost all of SBUX’s company-operated stores are leased. The company also leases space globally for regional, district and other administrative offices, training facilities and storage.

Figure 93: Significant Starbucks Properties Location Sq Ft Purpose Shanghai, China 211,000 Corporate administrative Seattle, WA 1,283,000 Corporate administrative Rancho Cucamonga, CA 265,000 Manufacturing Augusta, GA 131,000 Manufacturing Minden, NV (Carson Valley) 1,080,000 Roasting and distribution Gaston, SC (Sandy Run) 117,000 Roasting and distribution Kent, WA 510,000 Roasting and distribution Amsterdam, Netherlands 97,000 Roasting and distribution York, PA 1,957,000 Roasting, distribution and warehouse Washington, DC 130,000 Warehouse and distribution Stratford, CT 196,000 Warehouse and distribution Samutprakarn, Thailand 81,000 Warehouse and distribution Lebanon, TN 680,000 Warehouse and distribution Auburn, WA 491,000 Warehouse and distribution

Source: Company data

Fiscal Year End/Reporting Period SBUX’s fiscal year ends on the Sunday closest to September 30. Each of SBUX’s first three fiscal quarters consists of 13 weeks with the fourth fiscal quarter consisting of 13 or 14 weeks. FY21 is the next fiscal year with 53 weeks in the reporting period.

Starbucks Corporation (SBUX) 45 25 June 2019

Management & Board of Directors

Figure 94: Management & Board of Directors Management Profile Executive Position Years at SBUX

Kevin R. Johnson President & Chief Executive Officer 10 Patrick J. Grismer EVP & Chief Financial Officer Joined Nov 2018 Rosalind G. Brewer Chief Operating Officer & Group President 2 John Culver Group President International 17 Cliff Burrows Group President, Siren Retail 18

Mangement Compensation Stock & Option Non-Equity Executive Position Salary & Bonus Total Awards Incentive & Other Kevin R. Johnson President & CEO $1,461,533 $10,893,911 $1,027,036 $13,382,480 Scott Maw Former EVP & Chief FFO $800,007 $4,907,172 $273,590 $5,980,769 Rosalind G. Brewer COO & Group President $1,295,540 $6,731,948 $1,124,594 $9,152,082 Cliff Burrows Group President, Siren Retail $824,993 $4,416,453 $339,040 $5,580,486 John Culver Group President International $824,993 $4,416,453 $665,740 $5,907,186 Howard Schultz Founder & Former Executive Chairman & CEO $1 $27,957,619 $2,223,990 $30,181,610

Management Compensation Metrics

CEO Kevin R. Johnson Tenure as CEO 2-yrs Total Compensation ~$13.4MM Annual Incentive Bonus Metrics Weight Adjusted Net Revenue 40% Adjusted Operating Income 60% Long-term Incentive Metrics Vesting Period Stock Options 4-yrs PRSUs 3-yrs 2019 Adjusted EPS ROIC

Board of Directors Director Experience Joined Board

Myron E. Ullman, III Chairman of the Board; former Chairman & CEO of J.C. Penney 2003 Mellody Hobson Vice Chair of the Board; President, Ariel Investments 2005 Javier G. Teruel Former Vice Chairman of Colgate-Palmolive 2005 Kevin R. Johnson President & CEO of Starbucks 2009 Joshua Cooper Ramo Co-CEO & Vice Chairman of Kissinger Associates 2011 Clara Shih CEO of Hearsay Systems 2011 Mary N. Dillon CEO of Ulta Beauty 2016 Rosalind G. Brewer COO & Group President of Starbucks 2017 Jørgen Vig Knudstorp Executive Chairman of LEGO Brand Group 2017 Satya Nadella CEO & Director of Microsoft 2017 Source: Company data, Credit Suisse estimates

Starbucks Corporation (SBUX) 46 25 June 2019

Companies Mentioned (Price as of 21-Jun-2019) Starbucks Corporation (SBUX.OQ, $83.82, OUTPERFORM, TP $92.0)

Disclosure Appendix Analyst Certification I, Lauren Silberman, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Starbucks Corporation (SBUX.OQ)

SBUX.OQ Closing Price Target Price Date (US$) (US$) Rating 22-Jul-16 57.90 58.00 N 04-Nov-16 52.75 55.00 28-Apr-17 60.06 57.00 28-Jul-17 54.00 56.00 03-Nov-17 56.03 54.00 18-Jan-18 61.09 57.00 14-Mar-18 58.83 NC * Asterisk signifies initiation or assumption of coverage.

Effective July 3, 2016, NC denotes termination of coverage. NEUTRAL NOT COVERED

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potentia l to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stoc ks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Starbucks Corporation (SBUX) 47 25 June 2019

Credit Suisse's distribution of stock ratings (and banking clients) is:

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Starbucks Corporation (SBUX.OQ) Method: Our $92 target price and Outperform rating are based on ~27x our NTM EPS in 12 months, implying an EV/EBITDA multiple of ~18x our NTM EPS in 12 months. Our P/E multiple is in-line with the implied multiple relative to SBUX’s historical premium (5-year 9% historical premium), below SBUX’s current P/E multiple, but in-line with valuation in recent weeks. Our ~18x EV/EBITDA multiple is ~0.5x higher than SBUX’s current multiple and a premium to its five-year average EV/EBITDA multiple of ~14.5x.

Risk: Key risks to our $92 target price and Outperform rating include: competition, food safety and fluctuations in the value of foreign currencies. SBUX operates in a highly competitive restaurant environment. Food safety events, whether or not involving SBUX, could result in negative publicity, may reduce demand for Starbucks’ food, and could result in a decrease in guest traffic and sales. Fluctuations in the value of foreign currencies where SBUX operates or sources its products could adversely affect its revenues and profits.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): SBUX.OQ For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=436733&v=-v4a4hvq3szhdkwxywqstkfgo . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. This research report is authored by: Credit Suisse Securities (USA) LLC ...... Lauren Silberman

Starbucks Corporation (SBUX) 48 25 June 2019

Important Credit Suisse HOLT Disclosures The HOLT methodology does not assign ratings or a target price to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default variables and incorporated into the algorithms available in the HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. These adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variables may also be adjusted to produce alternative warranted prices, any of which could occur. The warranted price is an algorithmic output applied systematically across all companies based on historical levels and volatility of returns. Additional information about the HOLT methodology is available on request. CFROI, CFROE, HOLT, HOLT Lens, HOLTfolio, "Clarity is Confidence" and "Powered by HOLT" are trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse. © 2019 Credit Suisse Group AG and its subsidiaries and affiliates. All rights reserved. Important disclosures regarding companies that are the subject of this report are available by calling +1 (877) 291-2683. The same important disclosures, with the exception of valuation methodology and risk discussions, are also available on Credit Suisse’s disclosure website at https://rave.credit-suisse.com/disclosures . For valuation methodology and risks associated with any recommendation, price target, or rating referenced in this report, please refer to the disclosures section of the most recent report regarding the subject company.

Starbucks Corporation (SBUX) 49 25 June 2019

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Starbucks Corporation (SBUX) 50