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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
 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%
 Lowest in 5 years
 2008 Presidential Election
 Tax Policy
 War in Iraq
Industry analysis

 Operates within the Specialty Eateries


Industry
 Composed of companies that “own, operate,
and/or franchise limited menu eateries,
including gourmet coffee houses and bagel
shops.”
 “Leisure” services
 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.
 high traffic areas such as malls, university campuses,
stadiums, big-box retail units, and street corners.
 New challenges from rising health and obesity
concerns
 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 The US Standard Industrial Classification (SIC) Codes
 Starbucks 2095 Roasted coffee
 Tully's 5719 Misc. homefurnishings stores
 Peet's 5722 Household appliance stores
 Bad Ass Coffee 5735 Record & prerecorded tape stores
 Doughnut stores (Dunkin' 5812 Eating places
Brands' Dunkin Donuts, The North American Industry Classification System (NAICS) Codes
Krispy Kreme, and Tim 311920 Coffee and Tea Manufacturing
Hortons 44229 Other Home Furnishings Stores
 Smoothie stores (Jamba 443111 Household Appliance Stores
Juice, Smoothie King), ice 451220 Prerecorded Tape, Compact Disc, and Record Stores
cream shops (Dairy Queen, 722213 Snack and Nonalcoholic Beverage Bars
Cold Stone Creamery)
 Bagel stores (New World
Restaurant Group's Einstein
Bros., Bruegger's)
 Bakery stores (Auntie
Anne's, Mrs. Fields', and
Cinnabon.)
Firm Analysis: Overview
 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
 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 James Michael Casey


Chief Financial Officer
Schultz Donald
President Executive Vice President
Chairman of the
Chief Executive Chief Administrative
Board Officer
Officer
Founder
Ownership
 635 institutions are currently holding
shares of Starbucks
 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
 The Board of Directors believes each non-
employee 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 1
N/A 500 1.79K
Qtrly Rev Growth (yoy): 21.80% N/A N/A 15.50% 19.30%
Revenue (ttm): 8.21B 517.00M 1
N/A 1.48B 1.48B
Gross Margin (ttm): 58.76% N/A N/A 27.64% 35.30%
EBITDA (ttm): 1.36B N/A N/A 404.44M 404.44M
Oper Margins (ttm): 10.24% N/A N/A 20.70% 12.78%

Net Income (ttm): 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
Fair Comparison
Starbucks Industry
 EPS: 0.71  EPS: 1.19

 EBITDA: 1.36  EBITDA: 375 Million

Billion  NI: 220 Million


 NI: 612 Million  Share Price S&P
 Share Price: -15% 500: 10%
Potential Consequences of Future
Economic Conditions

 Negotiates independently of
commodities market
 Enters into long-term contracts with
farmers
 “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
 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
 Pacific Rim nations and India.
 Co-branding and brand
franchising opportunities with
other food and drink
manufacturers
 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
 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
 Steady State NOWC and NFA through
infinity.
 Beta Estimate
 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

 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.”