A credit memo on a lease-heavy company: Starbucks

Also from the notes: a 3.0 billion dollar unsecured revolving credit facility maturing June 2030; long-term deferred revenue is mostly the "approximately $7 billion" up-front prepaid royalty received from Nestlé in fiscal 2018, recognised over 40 years.

How it's built. Debt includes the current portion. Operating lease cost comes from the lease note, not the income statement, where it's spread across store operating and other expenses. "Restructuring and impairments" is its own line in operating expenses; the MD&A splits it: 352.8 million of impairment and disposal of store assets, 239.3 million "primarily associated with accelerated amortization of ROU lease assets and other lease exit costs", and the rest including support-organisation costs.

Workings: EBITDA = 2,937 + 1,772; before restructuring, + 892. EBITDAR = EBITDA + 2,097. Before restructuring, EBITDAR uses lease cost less the 239 million of accelerated ROU amortisation and lease exit costs (1,858), because the lease note's 2,097 probably already includes it (it exceeded cash lease payments of 1,901 by far more than in 2024): 5,601 + 1,858 = 7,459; fixed-charge cover (3,829 + 1,858) ÷ (543 + 1,858) = 2.4×. The note doesn't state this, so treat the 'before restructuring' column as an estimate. Lease-adjusted debt = 16,075 + 10,537 = 26,612; FY2024 15,568 + 10,235 = 25,803. Fixed-charge cover = (EBIT + 2,097) ÷ (543 + 2,097); FY2025 5,034 ÷ 2,640.

How it's built. Show the year with and without the restructuring charges, without counting the same lease costs twice, and don't let "before restructuring" become the main figure: closing stores costs real money, and some of it is cash. Fixed-charge cover is the key ratio for a company whose largest fixed cost is rent.

Free cash flow was 4,748 − 2,306 = 2,442 million, against dividends of 2,771 million: a shortfall of about 330 million, after a year without buybacks. In FY2024 free cash flow (3,318) didn't cover dividends and buybacks together (3,852) either.

The shareholders' deficit comes from years of buybacks and dividends above retained earnings; it doesn't mean the business is insolvent, but it removes the equity cushion that lenders often look at. Most of the 5.8 billion of long-term deferred revenue is not cash owed: it is the remainder of the roughly 7 billion royalty received from Nestlé in fiscal 2018, recognised as revenue over 40 years. It isn't debt, but about 175 million of reported revenue each year brings in no new cash.

Starbucks: a strong brand under pressure, with leverage rising and payouts above free cash flow · Source: Form 10-K for the year to 28 September 2025

View: still a solid credit, but weakening; the direction depends on whether the "Back to Starbucks" plan restores earnings before payouts and leases erode the cushion further.

What it owes. 16.1 billion of debt and 10.5 billion of operating lease liabilities: 26.6 billion lease-adjusted, 3.9× EBITDAR (about 3.6× before 892 million of restructuring and impairment costs), up from 3.0× a year earlier.

Cover. Interest is covered 5.4×, but fixed charges including rent only 1.9×, down from 3.1×. Rent is the cost a store chain can least avoid.

Cash. Free cash flow of 2.4 billion fell short of 2.8 billion of dividends. Buybacks stopped, but the dividend is now partly paid from cash or borrowing.

What protects lenders. A global brand and a large licensed and Nestlé royalty stream; 3.5 billion of cash and investments and an undrawn 3.0 billion credit line to 2030. There is no equity cushion (shareholders' deficit of 8.1 billion), and the bonds are unsecured.

What would change my view: lease-adjusted leverage staying above about 3.5× once restructuring costs stop (the plan isn't finished: read Note 18 for the costs still expected); fixed-charge cover below 2× for a second year; the dividend maintained with new debt. The other way: operating income recovering towards 2024 levels as store closures cut rent and the plan lifts sales.

How it's built. Lead with the view and its direction, then four short sections a committee can check against the table. Name the ratio that matters most for this business (fixed-charge cover), separate one-off from recurring, and explain the two items that confuse readers (negative equity, the Nestlé deferred revenue). End with triggers that follow from the weak points.

What a reviewer would flag:

• Adding the Nestlé deferred revenue to debt.
• Adding the restructuring back to EBITDA and the full lease cost back to EBITDAR, counting the accelerated lease amortisation twice.
• Using "before restructuring" figures as if the costs didn't happen.
• Calling negative equity "insolvency".
• Missing that dividends exceeded free cash flow.

Not debt-free in any useful sense: it has no borrowings but 5.1 billion of lease liabilities, and it spent far more than its free cash flow on buybacks. Operating lease liabilities are 5,076 million (302 current, 4,773 long-term) against EBITDAR of about 2,841 million (operating income 1,936 + depreciation 361 + operating lease cost 544), lease-adjusted leverage of about 1.8×, still modest; but buybacks of 2.4 billion against free cash flow of about 1.4 billion (2,114 − 666) cut cash and investments from 2.3 billion to 1.2 billion in a year. What would change my mind: buybacks returning to within free cash flow, or the opposite, a first drawing on its 500 million credit line to fund them.