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Morningstar Equity Analyst Report | Report as of 05 Feb 2019 11:45, UTC | Page 1 of 15

Starbucks Corp SBUX (XNAS) Morningstar Rating Last Price

Fair Value Estimate

QQQ

69.34 USD

74.00 USD

05 Feb 2019 22:39, UTC

05 Feb 2019

29 Nov 2018 15:50, UTC

Morningstar Pillars

Analyst

Quantitative

Economic Moat Valuation Uncertainty Financial Health

Wide QQQ Medium —

Wide Fairly Valued Medium Strong

Source: Morningstar Equity Research

Quantitative Valuation SBUX

Fairly Valued Current

Price/Quant Fair Value Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Trailing Dividend Yield%

0.98 29.6 25.1 7.3 8.7 1.95

Overvalued

5-Yr Avg

0.96 172.2 — 36.3 30.5 1.58

Sector Country

0.80 16.2 12.3 10.2 17.7 2.46

0.83 20.1 13.9 13.1 19.5 2.35

Source: Morningstar

Bulls Say OStarbucks continues to adapt to evolving consumer behaviors through a brand that transcends channels as well as digital (including mobile order and pay), social media, delivery partnerships, and loyalty program enhancements.

OPlanned food/beverage innovations and upscale store redesigns can elevate the Starbucks customer experience, unlock new dayparts, and lift unit-level productivity metrics.

ODespite its ambitious growth aspirations, we believe Starbucks can maintain a 60%-plus dividend payout ratio over the next decade, suggesting lowto midteens average annual dividend growth.

Bears Say OWith nonexistent switching costs, there is little to prevent consumers from trading to rivals like Dunkin' Brands, Tim Hortons, or McDonald's. Joh. A. Benckiser's consolidation of Panera, Mondelez's coffee assets, D.E Master Blenders, Peet's, Caribou, Einstein Noah, and Keurig could create more significant rivals.

OTeavana, Princi, and Evolution Fresh may not evolve into successful complementary brands and could divert attention away from the core Starbucks brand.

OCommodity cost fluctuations and foreign currency volatility can adversely impact quarter-to-quarter results.

Forward Dividend Yield %

Market Cap (Bil)

1.95

2.08

86.23

05 Feb 2019

05 Feb 2019

05 Feb 2019

Industry

Restaurants

Stewardship

Exemplary

Important Disclosure: The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy (or an equivalent of), and Investment Research Policy. For information regarding conflicts of interest, please visit http://global.morningstar.com/equitydisclosures

Menu Innovation, Digital Engagement, and Store Simplification Efforts Position Starbucks for Growth Business Strategy and Outlook

USA

Undervalued

Price/Fair Value Trailing Dividend Yield %

0.94

R.J. Hottovy, CFA, Analyst, 05 February 2019

Analyst Note

Despite uneven U.S. traffic trends, an evolving competitive set in China, and an increase in substitute products across multiple dayparts, we view Starbucks as a compelling consumer growth story, poised for top-line growth and margin expansion through menu innovations, sustainable cost advantages, and evolution into a diversified retail and consumer packaged goods platform. Although it is already the leading specialty coffee retailer in the United States, we believe Starbucks still has meaningful domestic growth potential, including new store formats (including premium destination locations as well as smaller-format express stores, drive-thrus, and kiosks), greater peak-hour capacity via digital enhancements, expanded food offerings, lunch/evening daypart expansion, Mobile Order & Pay, delivery partnerships with Alibaba's Ele.me and UberEats, and My Starbucks Rewards member engagement. While we appreciate investor concern about uneven transaction trends, we believe fundamentals will improve through new menu innovations developed at premium locations (with an emphasis on health and wellness), improved loyalty member acquisition and engagement techniques, simplified store operations/technologies, closing underperforming stores, and a reduction in SG&A expenses.

R.J. Hottovy, CFA, Analyst, 25 January 2019

Starbucks carried much of its momentum into fiscal 2019, with simplified store operations, improved digital engagement, and a stronger beverage assortment driving solid U.S. comps (up 4%) and delivery and digital efforts helping the company to weather a still-competitive China coffee landscape (China comps increased 1%). While there is additional work to be done with respect to the customer experience in both regions, we believe the operational, menu, and digital engagement changes Starbucks has implemented in its two largest markets--coupled with new go-to-market strategies through the Global Coffee Alliance (GCA) with Nestle--have stabilized the brand intangible asset underpinning our wide moat rating and should keep the company on track to meet--and likely exceed--the long-term goals it outlined at last month's investor day event, including 3%-4% comps (3%-4% in the U.S. and 1%-3% in China), 6%-7% net new unit growth (3%-4% U.S., midteens China), 8%-10% operating income growth (suggesting 17%-18% operating margins), and "at least 10%" EPS growth.

We're not planning material changes to our $74 fair value estimate and continue to view Starbucks as one of the Starbucks is much more than a U.S. and China retail story; most attractive names in the restaurant industry today it's just starting to scratch the surface of its long-term with several potential catalysts in the pipeline (new store channel and geographic growth potential. Many of formats and expanded delivery capabilities). Over the next Starbucks' core retail competencies should facilitate 10 years, we anticipate average annual revenue growth these efforts, putting it in a position to capture retail and of 8%, factoring in roughly 2-3 points of revenue growth wholesale market share. Platforms like K-Cups and impact from the GCA partnership beginning in 2020, 6% Nespresso should support channel diversification over the average annual unit growth, and 4% global comps driven medium term, aided by the Global Coffee Alliance by Mobile Order & Pay and other digital initiatives, new marketing/distribution partnership with Nestle. Longer beverage/food innovations, and restaurant throughput term, we're also optimistic about mobile, digital, and enhancements. Over a longer horizon, we anticipate loyalty program synergies across the various business operating margins exceeding 20% driven by sales lines; new payment technologies; and international leverage from streamlined store operations and expansion opportunities. Competitive threats exist in both technology initiatives, international scale improvements, the retail and wholesale channels, but a wide moat built and contribution from the GCA. on strong brand equity, bargaining clout with suppliers of all kinds, and a leverageable model will help to stave off Economic Moat rivals. R.J. Hottovy, Analyst, 05 February 2019

© Morningstar 2019. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order

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Morningstar Equity Analyst Report |Page 2 of 15

Starbucks Corp SBUX (XNAS) Morningstar Rating Last Price

Fair Value Estimate

QQQ

69.34 USD

74.00 USD

05 Feb 2019 22:39, UTC

05 Feb 2019

29 Nov 2018 15:50, UTC

Price/Fair Value Trailing Dividend Yield %

0.94

Forward Dividend Yield %

Market Cap (Bil)

1.95

2.08

86.23

05 Feb 2019

05 Feb 2019

05 Feb 2019

Nonexistent switching costs, intense industry competition, and low barriers to entry make it difficult for restaurants and specialty retailers to establish long-lasting competitive advantages, but with a brand intangible asset that commands premium pricing combined with meaningful scale advantages, Starbucks possesses a wide economic moat, in our opinion. We expect the company to maintain its specialty coffee leadership while successfully developing new growth avenues. Our confidence is supported by Starbucks' mobile/digital/loyalty offerings (including the My Starbucks Rewards and Mobile Order & Pay platforms and new partnerships with other consumer-facing companies), channel development efforts (K-Cups, Nespresso-compatible products, and other consumer packaged goods), delivery partnerships with Alibaba's Ele.me and UberEats, geographic market expansion opportunities (notably, China, India, and Japan), a complementary brand portfolio (the Starbucks Reserve sub-brand in particular, but also Princi and Teavana), and employee investments that have driven down attrition levels. In our view, each of these factors provides support for our estimates, which call for average annual revenue growth of just over 8% and cash flow growth in the low to mid-teens over the next decade. Although there are execution and brand saturation risks tied to management's current strategic plans, we believe if executed properly, they could fortify its already wide economic moat. With almost 14,800 company-owned and licensed locations in the U.S., Starbucks maintains a sizable lead over direct domestic rivals, including Dunkin' Donuts (over 9,300 U.S. points of distribution), Caribou Coffee, and Peet's Coffee (the last two chains, which account for a few hundred locations, are now owned by the Joh. A. Benckiser Group). With cafelike environments and a brand that evokes a high-quality customer experience, Starbucks enjoys pricing power advantages over most specialty coffee peers, which we believe will only be augmented by the incubation of the Starbucks Reserve sub-brand to distribute exclusive, higher-end coffee blends. New product platforms such as smoothies and tea, as well as a revamped food program, have added diversity to the menu, allowing the firm to broaden its target audience, increase its average transaction size, and expand more into the lunch and evening daypart. Starbucks also wields considerable influence over arabica coffee bean suppliers, ensuring access to raw materials at competitive prices. In addition, retail landlords often

Industry

Restaurants

Stewardship

Exemplary

grant Starbucks exclusive leases to prominent locations rife with consumer traffic, and we believe the company has a significant longer-term opportunity through the use of alternative store formats, including smaller-format express stores (400-600 limited service locations situated in high foot traffic locations), stand-alone drive-thrus, beverage trucks (which have been tested on college campuses), and kiosk locations. The company's strong landlord relationships and square footage creativity could accelerate the global growth aspirations of Starbucks' more nascent retail formats over the next decade and make it more difficult for rivals to compete. Many of Starbucks' competitive advantages also apply to international markets, which we view as a critical growth engine over the next several decades. With a widely recognized brand, Starbucks is among the few retail concepts to be successfully replicated across the globe. As such, we believe the firm will eventually exceed its domestic store count overseas. The chain has nearly 15,200 units in almost 80 countries outside the U.S., including some well-established cafe cultures. Emerging-market prospects are also intriguing, including opportunities in markets such as mainland China (which already has almost 3,700 units, on its way to 20,000 over a longer horizon, in our view) and India (which offers potential for at least 1,000 units over the next decade, in our view). We have a favorable view of Starbucks' decision to buy the remaining stakes of Starbucks Japan (2014) and Starbucks China (2017) that it didn't already own, as full ownership should help to accelerate inroads into new channels (with emphasis on the underpenetrated ready-to-drink market but also other licensing and food-service opportunities), roll out new brands, and accelerate mobile/digital/loyalty efforts, which in turn should help to build on already strong store-level profit metrics. Starbucks' channel development aspirations underscore the power of its brand intangible asset. We view the company as one of the few food-service operators that could evolve into a world-class consumer packaged goods company due to its ability to connect with grocery and mass-channel customers through licensed on-premises stores. With its already strong bargaining clout with national retailers like Amazon, Costco, Kroger, Whole Foods, and Trader Joe's, we expect Starbucks to develop national distribution of its entire consumer product portfolio over the next few years. Starbucks should also have ample opportunities to expand its presence on

© Morningstar 2019. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. To order

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Morningstar Equity Analyst Report |Page 3 of 15

Starbucks Corp SBUX (XNAS) Morningstar Rating Last Price

Fair Value Estimate

QQQ

69.34 USD

74.00 USD

05 Feb 2019 22:39, UTC

05 Feb 2019

29 Nov 2018 15:50, UTC

Price/Fair Value Trailing Dividend Yield %

0.94

Forward Dividend Yield %

Market Cap (Bil)

1.95

2.08

86.23

05 Feb 2019

05 Feb 2019

05 Feb 2019

grocery and mass-channel shelves across the globe through its Global Coffee Alliance (GCA) partnership with Nestle to market, sell, and distribute the Starbucks, Teavana, VIA, and other brands across more than 190 markets across the globe. We've been impressed by Starbucks' efforts to expand its distribution beyond traditional outlets, including other restaurant chains, hotels, airlines, universities, and offices. These developments give us confidence in our outlook calling for high-single-digit collective average annual revenue growth for the channel development and other segments over the next five years. More important, we anticipate that the channel development segment will become an increasingly important free cash flow contributor.

Fair Value & Profit Drivers R.J. Hottovy, Analyst, 05 February 2019

Our fair value estimate remains $74 per share following Starbucks' fiscal 2019 first-quarter update, as our model remains aligned with management's updated guidance calling for comps of 3%-4% (including 3%-4% in the U.S. and 1%-3% in China), 6%-7% net new unit growth (3%-4% U.S., midteens China), 7%-9% revenue growth, 8%-10% operating income growth (suggesting 17%-18% operating margins), and EPS growth of "at least 10%" over the next five years, but assumes modest upside in later years to new store formats, off-premises channel opportunities, streamlined operations, and increased international scale. Our fair value estimate represents fiscal 2020 price/earnings of 24 times and enterprise value/EBITDA of 16 times, versus current industry averages of 23 times earnings and 14 times EBITDA. We believe this premium is justified, given the firm's promising long-term growth and margin expansion story among large-cap consumer stocks. We expect fiscal 2019 global comps of 3.7% (above the midpoint of management's 3%-4% target) and 7% unit growth. Starbucks plans to open 2,100 net new stores globally, including 1,100 in the China/Asia-Pacific region (600 in China), 600 in the Americas segment, and 400 in the EMEA segment. Over the next 10 years, we anticipate average annual revenue growth of 8%, factoring in roughly 2-3 points of revenue growth impact from the Nestle partnership (GCA) beginning in 2020, 6% average annual unit growth, and 4% global comps driven by Mobile Order & Pay and other digital initiatives, new beverage/food innovations, and restaurant throughput enhancements.

Industry

Restaurants

Stewardship

Exemplary

We expect consolidated adjusted operating margins to contract 150 basis points to 16.5% in fiscal 2019 due in large part to the GCA but believe the adjusted EPS target of $2.68-$2.73 is achievable through SG&A reductions and share repurchases. Over the next five years, we project operating income growth around 8%, as the sales leverage derived from an improving top-line picture is partly offset by store operations investments, new retail configurations and equipment to better address evolving consumer preferences, and technology enhancements, with five-year margins coming at the high end of management's updated guidance (17.7%). Over a longer horizon, we anticipate operating margins exceeding 20% driven by from sales leverage from streamlined store operations and technology initiatives, international scale improvements, and contribution from the GCA.

Risk & Uncertainty R.J. Hottovy, Analyst, 05 February 2019

Starbucks faces competition on several fronts, including Dunkin' Brands' ambitious unit growth plans, McDonald's emphasis on McCafe and other beverage categories, increased rivalry with Jacobs Douwe Egberts (which combines the coffee assets of Mondelez, D.E Master Blenders, Peet's, Caribou Coffee, Einstein Noah Restaurant Group, Keurig Green Mountain, and Panera under the Joh. A. Benckiser Group umbrella), and a wave of smaller "third-wave" independent coffeehouses and specialty coffee programs from quick-service and fast-c...