Starbucks Equity Story

8/11/2019 Starbucks Equity Story

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THE COFFEE MARKET &

STARBUCKS

FINANCIAL ANALYSIS


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Table of Contents

Executive Summary

Recent Capital Markets Activity

Coff

ee Industry Overview

Company Considerations

Share price performance

Recent Corporate Actions

Operating Performance

Valuation

Trade Idea


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EXECUTIVE SUMMARY

This presentation evaluates the consumer services industry in which Starbucks (SBUX)operates.

In this analysis, I have identified the fundamental drivers of the coffee industry andcompany; to evaluate the intrinsic price of SBUXs shares using a fully integrated financialstatements forecast model and discounted cash flow valuation.

I have observed the following key valuation drivers with respect to the companys operatingperformance and documented assumptions for SBUX growth:

Growth of revenues in traditional markets and existing stores: Americas unit growth is likely

to rise. SBUX is increasing its performance in the US by designing all of its bakery, lunch andevening initiatives to optimize revenues throughout the day.

SBUX expanding to new markets: China retail opportunity is very attractive. Year-1 cash-on-cash

returns of 67% are almost double the U.S. in its nascent stage, with portfolio returns >100%.With a total unit opportunity of 12K in China, a sustained runway of annual 30%+ co-owned

unit growth is expected. Innovations: SBUX is expanding its product offering beyond ready-to-drink-coffee through

beverage innovations and new acquisitions (Teavana, La Boulange). The new mobile app

platform is also a key contributor to current and ongoing comp momentum.


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CAPITAL MARKETS

OVERVIEW


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Investor Sentiment Quotes

The recent unprecedented weather has affected both the 2014-15 and the

2015-16 crops () even under the most optimistic scenario, we expect asecond consecutive coffee market deficit. (Volcafe Ltd)

Foolish investors should strongly consider initiating positions in Starbucksright now, because I believe its long-term potential is far greater than that ofany other company in the industry (Joseph Solitro former financial analyst

at Capital Guardian LLC)

Starbucks is quickly making an impact in grocery stores with the sale ofpackaged coffee, Starbucks Refreshers, and even Oprah-branded Chai Tea.These initiatives, combined with the ongoing changes to Starbucks' menuofferings, outline a diverse set of growth drivers that leave little reason to

doubt that Starbucks will continue to drive earnings-per-share growth of15%. (Brian Shaw, former financial analyst at Atlantic Financial)


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Investor Sentiment Quotes

It used to be possible to be a global brand by dominating the US market.

Thats changing rapidly. Now you have to be number one in Asia. (MelanieMcShane, strategist at WolffOlins)

The opportunity is absolutely in India and China, but Ive seen opportunitiesall over the world. (Troy Alstead, Starbucks chief financial officer)

India is a very slow market, and unlike China Starbucks probably understandthat here it will take a lot of time. (Pinakiranjan Mishra, head of retail and

consumer goods for India at Ernst & Young)

Starbucks is a symbolic representative of unrefined food culture. (RuiChenggang, presenter at CCTV)

Starbucks stock is still reasonable in light of the powerful global brand,growth opportunities and innovation. In other words, the pros outweigh thecons on the stock. (Tom Taulli, InvestorPlace Writer)


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COFFEE INDUSTRY

OVERVIEW


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Co ee Industry Overview

(consumption and production)

Steady growth in world production,interspersed with periodic falls

Expansion of niche value markets int r ad i t iona l c ons uming c ount r i e s /Considerable potential in exportingcountries (although per capita consumptionlevels are still low)/ Growing demand fromemerging markets

Rise in costs of coffee production inputs,particularly fertilizers and labour

World co ee production by region

Production costs in exporting countriesorld co ee consumption by market

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Brazilian drought will affect both the2014-15 and 2015-16 crop seasons

Production has a much weakerinfluence on price than availability orstocks

Starbucks bias to hedge its coffeeexposure 12-18 months into the future

means the company should benefitfrom favourable input prices

Seasonal Surplus/ Deficit

Supply and demand ratioso ee price forecasts

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Co ee Industry Overview

(prices and production)

1965-1989 1990-2012

Global Availability/Consumption

1.81 1.50

World Production/Consumption

1.02 1.00

World Stocks/Consumption

0.80 0.50


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Competitive Landscape US Restaurant

Brands


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COMPANY

CONSIDERATIONS


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Key Company Considerations

Starbucks grew revenues in 2013 thanks to growth in comparable-store sales,

openings of 853 new stores and a series of new initiatives.

SBUX increased its performance in existing stores and in the US by designing allof its bakery, lunch and evening initiatives (wine, beer, and shareable smallplates) to optimise revenues throughout the day.

The company is expanding in new markets: in particular China, India and Korea.

The acquisitions of Teavana and Evolution Fresh expanded Starbucks offeringbeyond ready-to-drink coffee, giving tea (cf. Oprah-branded Chai Tea) and juiceoptions to customers. Benchmark product quality and price also increased withits new range of La Boulange products.

The company updated its mobile app platform, enabling customers to pull uptheir card by shaking their mobile device and transmit discretionary tips to

servers via smartphone.

The company sits on solid fundamentals. A one-time litigation charge resulted innegative free cash flow of $1.7 billion; however, minus this charge, growth in freecash flow would have increased y-o-y.


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Share Price Performance vs

Competitors (Last 12 Months)

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Starbucks Financial Forecasts

EBIT & Margin (14-18)

Profit & Margin (14-18)ales & Growth (14-18)

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The opening of new stores, diversification of

products on sale, the amelioration of marginsand the average augmentation of products

quality and prices explain the global revenuesgrowth

Movements in coffee prices imply Starbucks

could realize $350 million+ in cost savings inFY14 and FY15

Channel Development (Teavana, La Boulange) isa high-margin wild care for growth.


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Key Financial Metrics - Gearing

Starbucks Corp.'s debt-to-equity ratiodeteriorated significantly from 2012 to

2013, since the company paid $2.76 billionin litigation charges to settle a dispute

with Kraft over coffee distribution.

This cyclical cash deficit was unique and

Starbucks should pay down long-termdebt outstanding during FY14.

Given Starbucks robust gearing position,there is significant debt capacity to

reduce cost of capital or deploy throughfurther acquisitions

Net Debt / EBITDA

Net Debt / (Cash)

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Headline Operational Metrics

The Americas represent the most important

operating region with 74% of total sales. In Europe margins were negative due to:

Higher occupancy costs

Less productive stores

Economic uncertainty.

China is now a core market for Starbucks. In

2013, it was a record year for the region, wherethey opened 317 stores - with the highest

regional profit margin across all divisions. The

rest of Asia shows much promise includingSouth Korea and India.

Sales performance

EBIT Marginspened stores 2012-213

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Acquisition History

Since 1999, SBUX has acquired 7 businesses with $912.3 million total cumulative revenues.

SBUXs strategy has been to gradually expand the product line and gain control of the input costs and

supply chain needed to gain the most profit from that expansion. This has provided SBUX rapid cost savings and the addition of installed base and channels which has

created significant cross-sell/up-sell opportunities.

M&A Transaction History

Date Target Description Deal

1999 Tazo Tea tea & herbal tea manufacturer and distributor $8.1m

2003 Seattle Co ee Company specialty coffee retailer and wholesaler based inSeattle

$72m

2005 Ethos Water brand of bottled water with a social mission of"helping children get clean water."

$8m

2008 Co ee EquipmentCompany

Seattle-based manufacturer of coffee equipment $74.2m

2011 Evolution Fresh American-based company producing fruit juices, fruit

smoothies, gourmet soups, salads and signaturebowls

$30m

2012 Teavana specialty tea and tea accessory retailer based inAtlanta

$620m

2012 La Boulange French Bakery $100m


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TRADE IDEA


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Valuation Considerations

To evaluate the fundamental value of Starbucks

shares, I have built a 5-year discounted cash flowforecast for FY14-18E, incorporating my keyassumptions about the future potential of thecompany.

On a DCF basis, the company is intrinsicallyvalued at $83.7. Starbucks shares are currentlytrading on the NASDAQ Capital Market $78.86

per share (6%).

Tax rate 32%

Cost of debt: 4.7%

Long-term growthrate

1.8%

Cost of equity: 10.5%

WACC: 10.3%

2013 negative free cash flow of $1.7 billion is the result of a one-time litigationcharge. Minus this charge, growth in free cash flow would have increased. Sowe should not overweight this factor in the company valuation.

Given (i) industry-leading comp momentum and cash-on-cash returns, (ii)

accelerating U.S. unit growth, (iii) an outsized international opportunity(particularly China) and (iv) multiple drivers of medium-to-long term CPGgrowth that altogether I believe in an OUTPERFORM rating and 84 pricetarget.


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Discounted Cash Flow Analysis

Financial Year (Dec. Year end) 2013 2014 2015 2016 2017 2018 Terminal Period

Total Turnover 14,892 16,338 18,072 19,782 21,575 23,551

growth (%) 9.7% 10.6% 9.5% 9.1% 9.2%

EBIT -325 2,859 3,488 3,956 4,531 5,181

margin (%) -2.2% 17.5% 19.3% 20.0% 21.0% 22.0%

Depreciation & Amortisation 621.4 736.1 792.3 859.4 934.8 1,017.5

Tax @ 32.0% 104.1 (914.9) (1116.1) (1266.1) (1449.9) (1658.0)

Capital Expenditure (1151.2) 980.3 1084.3 1186.9 1294.5 1413.1

Capex/Sales (%) 7.7% -6.0% -6.0% -6.0% -6.0% -6.0%

Working Capital 0.0 (588.9) (126.4) (109.8) (123.2) (137.5)

Working Capital / Sales (%) 0.0% 3.6% 0.7% 0.6% 0.6% 0.6%

Free Cash Flow 1,551.3 1,111.1 1,953.4 2,253.1 2,598.0 2,990.2 2,990.2

Discount Factor 0.9064 0.8216 0.7447 0.6750 0.6119 0.6119

Terminal Value 35,485

Present Value 1,007.1 1,604.9 1,677.9 1,753.7 1,829.6 21,712Enterprise Value (m) 65,071

Net Debt as at (Dec 2013) 1299.4

Market Capitalisation (m) 63,771

No. Shares (m) 762

Share Price ( ) 83.7


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APPENDIX


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Starbucks Income Statement

Starbucks

Hist. Hist. Hist Proj. Proj. Proj. Proj. Proj.

Income Statement

31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18

Net Sales 11,700.4 13,299.5 14,892.2 16,337.6 18,072.0 19,782.2 21,575.4 23,551.3

COGS 4,915.5 5,813.3 6,382.3 6,739.3 7,292.1 7,912.9 8,522.3 9,185.0

SG&A 5,056.4 5,488.8 8,835.3 6,739.3 7,292.1 7,912.9 8,522.3 9,185.0

EBIT 1,728.5 1,997.4 (325.4) 2,859.1 3,487.9 3,956.4 4,530.8 5,181.3

Depreciation&Amortization 523.3 550.3 621.4 736.1 792.3 859.4 934.8 1,017.5

Amortization 0.0 0.0 0.0 0.0 0.0

EBITDA 2,251.8 2,547.7 296.0 3,595.2 4,280.2 4,815.9 5,465.6 6,198.8

Non-recurring items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Interest Income 115.9 94.4 123.6 12.9 0.0 0.0 0.0 0.0

Interest Expense (33.3) (32.7) (28.1) 58.2 65.8 70.4 80.2 98.2Profit before taxes 1,811.1 2,059.1 (229.9) 2,813.8 3,422.1 3,886.0 4,450.6 5,083.1

Taxes 563.1 674.4 (238.7) 1,547.6 1,882.2 2,137.3 2,447.8 2,795.7

Profit after tax 1,248.0 1,384.7 8.8 1,266.2 1,540.0 1,748.7 2,002.8 2,287.4

Net earnings attribut. to nncontr. Interests 2.3 0.9 0.5 1.0 1.0 1.0 1.0 1.0

Net income 1,245.7 1,383.8 8.3 1,265.2 1,539.0 1,747.7 2,001.8 2,286.4

Shareholder information

Basic weighted average shares outstanding 748.3 754.4 749.3

Diluted weighted average shares outstanding 769.7 773.0 762.3 770.0 770.0 770.0 770.0 770.0

Diluted earnings per share $1.62 $1.79 $0.01 $1.64 $2.00 $2.27 $2.60 $2.97

Dividends per share $0.56 $0.72 $0.89 $1.11 $1.39 $1.74 $2.17 $2.72

Dividends 419.0 543.2 666.9 856.6 1,070.8 1,338.5 1,673.1 2,091.4


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Starbucks Balance Sheet

Starbucks

Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.

Balance Sheet


Assets

Current assets

Cash and cash equivalents 1,148.1 1,188.6 2,575.7 0.0 0.0 0.0 0.0 0.0

Sales, maturities and callsAccounts receivable 386.5 485.9 561.4 571.8 632.5 692.4 755.1 824.3

Inventories 965.8 1,241.5 1,111.2 1,179.4 1,276.1 1,384.8 1,491.4 1,607.4

Other current assets 1,294.5 1,283.6 1,223.1 1,633.8 1,807.2 1,978.2 2,157.5 2,355.1

Total current assets 3,794.9 4,199.6 5,471.4 3,384.9 3,715.8 4,055.4 4,404.1 4,786.8

Non-current assets

Net PP&E 2,355.0 2,658.9 3,200.5 3,444.6 3,736.7 4,064.2 4,423.9 4,819.5Goodwill 321.6 399.1 862.9 862.9 862.9 862.9 862.9 862.9Other intangibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other assets 888.9 961.6 1,981.9 1,470.4 1,626.5 1,780.4 1,941.8 2,119.6

Total assets 7,360.4 8,219.2 11,516.7 9,162.9 9,941.9 10,762.8 11,632.7 12,588.8

Liabilities

Current liabilities

Short term debt 0.0 0.0 0.0 1,288.4 1,342.7 1,473.4 1,735.3 2,192.0Accounts payable and accruals 2,075.8 2,209.8 2,593.2 2,493.5 2,698.1 2,927.8 3,153.2 3,398.4Accrued litigation charge 0.0 0.0 2,784.1 0.0 0.0 0.0 0.0 0.0

Total current liabilities 2,075.8 2,209.8 5,377.3 3,782.0 4,040.8 4,401.2 4,888.6 5,590.4

Non-current liabilities

Total long-term debt 549.5 549.6 1,299.4 0.0 0.0 0.0 0.0 0.0Other long-term liabili ties 347.8 345.3 357.7 490.1 542.2 593.5 647.3 706.5

Total liabilities 2,973.1 3,104.7 7,034.4 4,272.1 4,583.0 4,994.7 5,535.9 6,296.9

Equity

Common stock 0.7 0.7 0.8 0.7 0.7 0.7 0.7 0.7Retained earnings 4,297.4 5,046.2 4,130.3 4,538.9 5,007.0 5,416.3 5,745.0 5,940.0

Treasury stock 86.8 62.1 349.1 349.1 349.1 349.1 349.1 349.1Noncontrolling interests 2.4 5.5 2.1 2.1 2.1 2.1 2.1 2.1

Total equity 4,387.3 5,114.5 4,482.3 4,890.8 5,358.9 5,768.2 6,096.9 6,291.9Total Liab.& Equity 7,360.4 8,219.2 11,516.7 9,162.9 9,941.9 10,762.8 11,632.7 12,588.8

Balance?

OK OK OK OK OK OK OK OK


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Starbucks Cash Flow Statement

Starbucks


Cash Flow Statement


Net Income 1248.0 1384.7 8.8 1265.2 1539.0 1747.7 2001.8 2286.4

Depreciation 550.0 580.6 655.6 736.1 792.3 859.4 934.8 1017.5

Amortisation 0 0 0 0.0 0.0 0.0 0.0 0.0

Change in OWC 166.4 189.0 (1016.9) (3373.0) (126.4) (109.8) (123.2) (137.5)

Change in other assets -306.0 -488.5 249.2 511.5 (156.1) (153.9) (161.4) (177.8)

Change in other liabilities -46.0 84.5 227.5 132.4 52.0 51.3 53.8 59.3

Litigation charge 0.0 0.0 2784.1 0.0 0.0 0.0 0.0 0.0

Cash from Operating Activities 1612.4 1750.3 2908.3 -727.8 2100.8 2394.7 2705.7 3047.8

Sales, maturities and calls of investments 430.0 1796.4 1040.2 0.0 0.0 0.0 0.0 0.0

Capex 531.9 856.2 1151.2 980.3 1084.3 1186.9 1294.5 1413.1

Others 1027.6 1914.2 1300.2 0.0 0.0 0.0 0.0 0.0

Cash from Investing Activities -1989.5 -4566.8 -3491.6 -980.3 -1084.3 -1186.9 -1294.5 -1413.1

Change in Common Stock -305.5 -312.5 -340.9 -0.1 0.0 0.0 0.0 0.0

Dividends -389.5 (513.0) (628.9) (856.6) (1070.8) (1338.5) (1673.1) (2091.4)

Long Term Debt Repayment 0.0 0.0 714.5 (1299.4) 0.0 0.0 0.0 0.0

Other 87.0 80.0 147.1 0.0 0.0 0.0 0.0 0.0

Change in Non Controlling Int. 3.1 (3.4) 0.0 0.0 0.0 0.0 0.0

Cash from Financing Activities (608.0) (742.4) (111.6) (2156.1) (1070.8) (1338.5) (1673.1) (2091.4)

Effect of exchange rate -0.8 9.7 -1.8 0 0 0 0 0

Net Cash Flow -985.9 -3549.2 -696.7 (3864.1) (54.3) (130.7) (261.9) (456.6)

Beginning Cash 1164 1148.1 1188.6 2575.7 (1288.4) (1342.7) (1473.4) (1735.3)

Ending Cash 1148.1 1188.6 2575.7 (1288.4) (1342.7) (1473.4) (1735.3) (2192.0)


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Starbucks Financial Assumptions



Sales growth 13.7% 12.0% 9.7% 10.6% 9.5% 9.1% 9.2%

COGS as % of sales 54.5% 43.7% 42.9% 41.3% 40.4% 40.0% 39.5% 39.0%Annual depr. as % of previous PPE 23.4% 23.4% 23% 23% 23% 23% 23%

SG&A as % of sales 43.2% 41.3% 59.3% 41.3% 40.4% 40.0% 39.5% 39.0%

Amortization of other intangibles amount 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Non-recurring items amount 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Effective tax rate 31.1% 32.8% 103.8% 55.0% 55% 55% 55% 55%

Diluted weighted average shares outstanding 769.7 773.0 762.3 770 770 770 770 770

Dividend per share growth rate 28.6% 23.6% 25% 25% 25% 25% 25%

Accounts receivable as % of sales 3.3% 3.7% 3.8% 3.50% 3.50% 3.50% 3.50% 3.50%

Inventories % of COGS 15.1% 21.4% 17.4% 17.50% 17.50% 17.50% 17.50% 17.50%

Other current assets % of sales 11.1% 9.7% 8.2% 10% 10% 10% 10% 10%

Capital expenditures % of sales 4.5% 6.4% 7.7% 6% 6% 6% 6% 6%

Other assets % of sales 7.6% 7.2% 13.3% 9% 9% 9% 9% 9%

Accounts payable and accruals % of COGS 32.5% 38.0% 40.6% 37% 37% 37% 37% 37%

Accrued litigation charge % of tax expense 0.0% 0.0% (1166.4%) 0% 0% 0% 0% 0%

Other long-term liabilities % of sales 3.0% 2.6% 2.4% 3% 3% 3% 3% 3%

Common stock amount 0.7 0.7 0.8 0.7 0.7 0.7 0.7 0.7

Share repurchases $ amount (show as positive) 24.7 (287.0) 0.0 0.0 0.0 0.0 0.0

Loans due for repayment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other long-term debt repayment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Short term debt 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Loans due for repayment 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

Other long-term debt repayment 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

Cash 1.00% 1.00% 1.00% 1.00% 1 .00% 1.00% 1.00% 1.00%


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Starbucks Revenue Forecasts

Operating Profit (EBIT)

Actual Actual Actual Forecast Forecast Forecast Forecast Forecast2011 2012 2013 2014 2015 2016 2017 2018

EBIT 1728.5 1997.4 -325.4 2331 2720 2987 3056 3252

EBIT Margin (%) 15% 15% -2% 18% 19% 20% 21.00% 22.00%

EBIT Growth (%) 16% -116% -816% 17% 10% 2% 6%

FINAL REVENUES

FORECAST

2014 2015 2016 2017 2018

Americas 10,532 11,006 11,501 12,019 12,560EMEA 1,183 1,207 1,231 1,256 1,281

CAP 1,100 1,320 1,585 1,901 2,282

Other 504 562 620 906 993

Channel 3,018 3,976 4,845 5,493 6,436

Total

16,338 18,072 19,782 21,575 23,551


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Starbucks Operating Assumptions

Opened stores Stores open as ofsept 30, 2012

Opened Closed NetStores open as of

sept 29, 2013

Americas 7802 319 -43 276 8078

EMEA 882 34 -63 -29 853

CAP 666 252 -12 240 906

Other segments 14 353 -10 343 357

Worldwide

9364 958 -128 830 10194

Revenues growth

2011 2012 2013 2014 2015 2016 2017 2018Americas 8% 8% -10% 6% 5% 5% 5% 5%

EMEA 3% 0% 2% 2% 2% 2% 2% 2%

CAP 22% 15% 27% 20% 20% 20% 20% 20%

Consolidated

8% 7% 7% 7% 7% 7% 7% 7%


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Starbucks Equity Story