Starbucks

Company Analysis

TEAM NUMBER: 17 ADRIAN AIZENSTAT MATT FLUHARTY WESLEY JONES JOHN LITHGOW JARROD SCHILLING

FINANCIAL MANAGEMENT (SECTION 2109)

Agenda Economic Climate Industry analysis Firm Analysis Overview

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Management Other Issues Detailed Financial Analysis Financial Comparison to Industry Potential Consequences of Future Economic Conditions SWOT Analysis

Intrinsic Value of Stock Overall Summary

Economic Climate 

Past   

Dot-com and Tech Stock “Bubble” September 11th Attacks 2003 Tax Cuts

Economic Climate 

Present   

National Debt Increasing National Security Costs $400 Billion Spent on Military efforts since 2003

Economic Climate 

2007 Growth Rate – 2.2% 

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2008 Presidential Election 

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Lowest in 5 years Tax Policy

War in Iraq

Industry analysis 

Operates within the Specialty Eateries Industry 

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Composed of companies that “own, operate, and/or franchise limited menu eateries, including gourmet coffee houses and bagel shops.” “Leisure” services 

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often a useful measure of consumer confidence due to the impulsive, indulgent purchasing.

Highly cutthroat market 

Pursuit of worldwide expansion for narrow profit points.

Industry analysis 

Strategically position themselves in locations in order to capitalize on impulsive customers. 

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high traffic areas such as malls, university campuses, stadiums, big-box retail units, and street corners.

New challenges from rising health and obesity concerns 

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Seen in the past by its sister sector fast food and quick services. Rising demand for low-carb dieting Participants in this industry hope diet are temporary trends and seek customer loyalty as their primary base.

Industry analysis 

Generally, special eateries include: 

Coffee shops    

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Starbucks Tully's Peet's Bad Ass Coffee

Doughnut stores (Dunkin' Brands' Dunkin Donuts, Krispy Kreme, and Tim Hortons Smoothie stores (Jamba Juice, Smoothie King), ice cream shops (Dairy Queen, Cold Stone Creamery) Bagel stores (New World Restaurant Group's Einstein Bros., Bruegger's) Bakery stores (Auntie Anne's, Mrs. Fields', and Cinnabon.)

The US Standard Industrial Classification (SIC) Codes 2095

Roasted coffee

5719

Misc. homefurnishings stores

5722

Household appliance stores

5735

Record & prerecorded tape stores

5812

Eating places

The North American Industry Classification System (NAICS) Codes 311920

Coffee and Tea Manufacturing

44229

Other Home Furnishings Stores

443111

Household Appliance Stores

451220

Prerecorded Tape, Compact Disc, and Record Stores

722213

Snack and Nonalcoholic Beverage Bars

Firm Analysis: Overview 

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Founded in 1985 in Seattle, Washington. 13,618 Retail Stores Operates in US, Canada, UK, Ireland, China, Germany, Australia, and others. One of the Biggest Growth Companies of the 90’s. Variety of beverages and baked goods. Also sells pre-made

Firm Analysis 

Exceptionally strong and enduring growth & performance 

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Opened 2,199 new stores globally (ahead of original target of 1800) at an average pace of 6 new stores per day Bringing total to 12,440 stores in 37 countries Revenues increased 22% to $7.8 billion Net Earnings of %564 million or $0.71 earnings per share 15 consecutive years of 5% or greater comparable store sales growth

Management

Howard Schultz Chairman of the Board Founder

James Donald President Chief Executive Officer

Michael Casey Chief Financial Officer Executive Vice President Chief Administrative Officer

Ownership 

635 institutions are currently holding shares of Starbucks 

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The top institutional holders are Sands Capital Management, Inc., Fidelity Management & Research Corporation, and Capital Research and Management Company, which hold 44,517,978, 37,543,158, and 32,088,400 shares, respectively

Chairman Howard Schultz remains on top direct holder with 17,020,396 shares.

Compensation Policy 

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The Board of Directors believes each nonemployee director owns shares of Starbucks Each current non-employee director is required to have invested at least $200,000 to purchase shares of the Starbuck’s common stock and must continue to hold this investment as long as such director serves on the Board. The Board will review the compensation of the non-employee directors and committee members in relation to other comparable companies nationwide.

Financial Analysis 

“If you had put in $1000 into SBUX when company went public in 1992, you’d have been $52,718.10 to the good at year-end 2006, v.s. $3155.30 for S&P 500.

ROE

ROA

Growth

Price/Book

Debt

Equity

Starbucks

26.21%

14.17%

19.15%

9.56

13%

87%

Panera Bread

16.47%

12.62%

19.12%

4.46

0%

100%

Caribou Coffee Company

-9.78%

-2.67%

n/a

1.56

0%

100%

Peet's Coffee and Tea Inc.

6.15%

5.83%

14.80%

2.93

0%

100%

Financial Comparison to Industry DIRECT COMPETITOR COMPARISON SBUX

Pvt1

NSRGF.PK

THI

INDUSTRY

Market Cap:

23.78B

N/A

N/A

6.18B

6.18B

Employ-ees:

145,800

953

N/A

500

1.79K

Qtrly Rev Growth (yoy):

21.80%

N/A

N/A

15.50%

19.30%

8.21B 517.00M

N/A

1.48B

1.48B

Revenue (ttm): Gross Margin (ttm):

1

1

58.76%

N/A

N/A

27.64%

35.30%

1.36B

N/A

N/A 404.44M

404.44M

10.24%

N/A

N/A

20.70%

12.78%

612.27M

N/A

N/A 231.41M

231.41M

EPS (ttm):

0.753

N/A

N/A

1.248

1.25

P/E (ttm):

42.05

N/A

N/A

26.01

27.30

PEG (5 yr expected):

1.53

N/A

N/A

1.75

1.53

P/S (ttm):

2.82

N/A

N/A

4.13

2.15

EBITDA (ttm): Oper Margins (ttm): Net Income (ttm):

Fair Comparison Starbucks  EPS: 0.71  EBITDA: 1.36 Billion  NI: 612 Million  Share Price: -15%

Industry  EPS: 1.19  EBITDA: 375 Million  NI: 220 Million  Share Price S&P 500: 10%

Potential Consequences of Future Economic Conditions 

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Negotiates independently of commodities market Enters into long-term contracts with farmers 

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“For years it has paid fair-market prices to 3rd world coffee farmers and helped develop ecologically sound growing practices” [Forbes]

Builds direct relationships with

SWOT Analysis 

Strengths     

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Reputation for having the finest products and services in the world Has expanded into 40 countries and has over 9000 cafes worldwide Fortune’s Top 100 Companies To Work For in 2005 Forbe’s Most Admired Companies 2007 (#2) An organization based on quality products, with strong ethical values

Weaknesses   

Some analysts predict that their creativity and innovation may weaken in the future Needs to increase the company’s globalization in order to fully exploit untapped markets May have tough time diversifying into other sectors

SWOT cntd. 

Opportunities   

Product Line Extensions CD burning service with Hewlett Packard and Fair Trade products International expansion 

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Co-branding and brand franchising opportunities with other food and drink manufacturers 

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Pacific Rim nations and India.

PEPSI CO

Product Placement

SWOT 

Threats    

Substitutes for coffee Cannibalization Rising cost of coffee and dairy products “Watering-down of the Starbucks experience” and “commoditization of our brand” 

Internal memo that surfaced in February warning executives

Intrinsic Value  

Discounted Cash Flow Analysis EBIT Growth 

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Years 1-5: Upper end of analysts consensus, 24% Years 6-10: Reduced domestic growth, continuing international growth, 20% Years 11-Infinity: Assumed rate of inflation, 3%

Intrinsic Value 

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Steady State NOWC and NFA through infinity. Beta Estimate 

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Scottrade, Thomson One, Yahoo Finance, S&P. Used 4 betas to compute 4 WACCS and 4 intrinsic values.

Intrinsic Value 

Other Assumptions     

Market Risk Premium: 5% Long-term Treasury Yield: 4.82% Tax Rate: 37% Equity Weight: 87% Debt Weight: 13%

Overall Summary 

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The resulting intrinsic value per share ranged between $37.13 to $48.10, with an average of $40.99 Current price (as of 4/22/07) of $31.66. As a result, we believe the stock price is slightly under priced and can expect adjustments. This price will increase directly to investor expectations and the continued pursuit of international growth strategy while maintaining “the Starbucks experience.”