MFIN 823 - Starbucks Research Report

MFIN 823

Equity Markets and Analysis

George Klar

Group Research Report – Starbucks Corporation September 18, 2015

Simon Wang, Tahir Masood, Ola Salami, Yuki Yao, Jessica Lau, Steven Xu

Order of files:

Filename Pages Comments and/or Instructions

Starbucks – Research Project 18

Additional Comments:

[TEAM 3B] Starbucks – Group Research Report ___________________________________________________________________________________________________________________________________________________________________

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Table of Contents

Highlights ..................................................................................................................................................... 3

Business Description ................................................................................................................................... 4

Starbucks’ Current Strategy ...................................................................................................................... 4

Management ................................................................................................................................................ 5

Industry Overview and Competitive Positioning ..................................................................................... 5

Global Economy ....................................................................................................................................... 5

Industry Outlook ....................................................................................................................................... 5

SWOT Analysis ........................................................................................................................................ 6

Investment Strategy .................................................................................................................................... 7

Strong Financial Position and Dividend Growth ...................................................................................... 7

Optimistic Outlook in China and Pacific Region ...................................................................................... 7

Sensitivity Analysis................................................................................................................................... 7

Valuation ...................................................................................................................................................... 8

DCF Valuation .......................................................................................................................................... 8

DDM Valuation......................................................................................................................................... 9

Financial Analysis ..................................................................................................................................... 10

Stable Profit Margins in Short-Term, Substantial Growth in Mid-Term ................................................ 10

Liquidity .................................................................................................................................................. 11

ROE Decomposition ............................................................................................................................... 11

Investment Risks ....................................................................................................................................... 11

Market Risk ............................................................................................................................................. 11

Economic Risk ........................................................................................................................................ 12

Operational Risk ........................................................................................................................................ 12

Appendices ................................................................................................................................................. 13

References .................................................................................................................................................. 17

Disclosures ................................................................................................................................................. 18


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Cyclical Consumer Goods & Services Sector, Restaurants & Bars Industry

NASDAQ

STARBUCKS CORPORATION _________________________________________________________________________________________________________________________________________________________________________________________________________

Date: 09/16/2015 Ticker: SBUX Recommendation: BUY (10.5% Upside)

Price: $57.26 Price Target: $63.25

Highlights_____________________________________________

We issue a BUY recommendation for Starbucks (NASDAQ: SBUX) based on a one-

year target price of $63.25 USD. It implies an upside of 10.5% from its closing price

of $57.26 on September 16, 2015 and a projected one-year holding period return of

11.9%, with an expected dividend of $0.80 USD. Our recommendation is primarily

driven by:

Expansion into CAP – Starbucks’ expansion strategy into the China and Pacific

(CAP) segment is one of the main growth drivers. After solid growth and

performance in this region in the 2014 fiscal year, Starbucks projects to open

approximately half of their net new stores the following year in the region.

Combined with the strong economic growth China is experiencing, this provides

Starbucks with future growth potential and a positive outlook.

Strong Leadership and Management – In the highly competitive market,

Starbucks has been able to continue its dominance in the industry due to its strong

management team. In recent years, Starbucks has gained a competitive advantage

over its customers with innovative and out-of-the-box ideas. For example, they

have partnered with La Boulange to improve upon the quality and selection of their

food. Starbucks will soon be launching their first Evening stores, where consumers

can enjoy a selection of wine and craft beer1.

Strong Industry Growth – As part of the fast-food industry, there is potential for

Starbucks to grow at a rate above the GDP. The ability to adapt and create new

products based on societal trends is one of the driving factors of the industry.

Potential Risks – Although China posted a GDP growth rate of approximately 7%

this year, there is some uncertainty toward its future and its economy is considered

to be slowing down. This is a potential risk for Starbucks, as the firm is expanding

into the CAP region. Another potential risk is the recent entrance of McDonald’s

into the coffee market with McCafé. Since McDonald’s is a worldwide symbol, its

emergence could mean potential loss of market share.

Starbucks: Share Price

Source: Yahoo! Finance

Target Price

FCFF $63.30

FCFE $62.42

DDM $64.05

Target Price

(Average) $63.25

Source: Team Estimates

Source: External Data


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Business Description____________________________________

Starbucks Corporation, doing business as Starbucks Coffee, is an American global

coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the

largest coffeehouse company in the world, with 21,536 stores in 64 countries. It is

listed on New York stock exchange (NYSE) with a current market capitalization of

$85.5 billion.

Starbucks enjoyed positive results in recent years based on strong momentum in the

US and organic growth in major emerging markets. The company focuses on

delivering unique Starbucks Experience and serving high-quality coffees. It continues

to explore diversification into new categories including tea, bakery goods, and even

dairy products, on a path towards becoming a global consumer brand, rather than solely

a coffee purveyor. Moving forward, Starbucks is looking to new markets in Latin

America, strengthening its position in Western Europe and renewing its focus on

China.

The product analysis, as shown in Figure 1, reveals that the beverages segment is the

largest contributor to the bottom line revenue with 75%, while the food, packaged and

single serve coffee, coffee making equipment/other merchandise contributes 19%, 4%

and 2% respectively2.

Starbucks’ Current Strategy

Be the employer of choice – Starbucks invests in partners capable of delivering

superior customer experience; 47% of the customer chooses Starbucks because of

their connection experience with the barista.

Coffee leadership – Starbucks builds upon their leadership position with their

commitment to coffee, delivering 100% ethically sourced coffee. They also work

directly with farmers and ensure a sustainable supply of quality coffee.

Grow the store portfolio with disciplined expansion – With focusing on the footprint

in Asia, Starbucks is increasing the scale within the China, India and Japan markets.

Create new occasions – Starbucks will be more competitive in expanding its business

to include breakfast and lunch items. They are in the process of building an evening

program by providing wine, beer and shareable plates to attract more customers.

Consumer product brand growth – Within the channel development, Starbucks’s

products are growing 18% year over year in the aisles of grocery stores. Starbucks

also went into a strategic partnership with Tingyi, one of Chinese largest beverage

players to deliver Starbucks ready to drink coffee within China.

Build other brands – Starbucks created a second major business in the tea market. A

number of brands under Starbucks helped Starbucks expand their morning business.

Teavana, Evolution Fresh and Bay Bread are increasing their profits during peak

times by boosting store traffic and average checks.

Extend digital engagement – Starbucks drive convenience and brand engage. One in

seven adults in the US received a holiday Starbucks gift card in 2014. In addition,

Figure 1. Product Segments

Source: Company Data


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Starbucks processes 8 million payments per week by mobile pay. Customers also

receive promotional deals by registering for its Starbucks loyalty rewards.

Management__________________________________________

A quick summary of the top echelon of Starbucks Corporation reveals that the

management making the firm’s day-to-day decisions are middle-aged, with plenty of

management experience. The management is considered stable and is expected to

remain constant in the foreseeable future. Starbucks Corporation has also adopted an

impressive succession strategy, which will help continue the vision and goals set by

the current management team (See Appendix A).

Industry Overview and Competitive Positioning_____________

Global Economy

Global growth is expected to be 2.8 percent in 2015, lower than anticipated in January.

Growth is expected to pick up to 3.2 percent in 2016–17, broadly in line with previous

forecasts3. Developing economies are facing two transitions. First, the broad-based

appreciation in the U.S. dollar is exerting downward pressure on capital flows to

developing countries. Second, lower oil prices are having an increasingly pronounced

impact. In oil-importing countries, the benefits to activity have so far been limited,

although they are helping to reduce vulnerabilities. In oil-exporting countries, lower

prices are sharply reducing activity and increasing fiscal, exchange rate, or inflationary

pressures. The continued growth in real terms in the United States of America has

continued to help the food industry. With more disposable income to Americans and

the high growth rate has seen rise in demand for consumer goods and services.

Industry Outlook

Starbucks competes in the fast-food/specialty beverage industry, facing many

competitors, such as McDonalds (MCD), Aramark (ARMK), Yum! Brands Inc.

(YUM), Darden Restaurant (DRI) (Figure 2). Starbucks has a large market share in the

industry, with a combined industry revenue in excess of $197 billion in 2014.

Industry Growth – The food industry has shown continuously growth in sales and

revenues since it was first introduced into the market. From 1970 to 2012 the total

revenue of the fast food industry rose from $6 billion to $160 billion4. The growth

potential poses future opportunities for Starbucks to capitalize on. One of the major

competitors is McDonald’s. This well-known franchise restaurant introduced coffee to

its menu in Canada in 2001 and added many different forms of coffee to their menu,

such as iced coffee, Frappé and flavored coffee5. In order for Starbucks to continue to

be competitive in this industry, it must use this industry as a basis when making

business decisions. There is expected growth for Starbucks in this market because of

the many societal trends. For example, one of the trends is that society is starting to eat

healthier. Starbucks has adapted and now offers consumers with the option of healthier

snacks and beverages.

Figure 2. Major Plays in Industry

Source: External Data


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Chart I – Starbucks Historical

Price and Major Event

1/24/13: Starbucks net meets estimates

as European store sales slide

7/26/13: Starbucks food bet drives

traffic as profit tops estimates

10/23/13: Starbucks to open tea bar in

New York in push beyond coffee

01/23/14: Starbucks quarterly sales

trail estimates as us growth slows

03/20/14: Starbucks to expand evening

alcohol sales to thousands of stores

7/24/14: Starbucks profit exceeds

estimates after food menu boost sales

12/04/14: Starbucks plans to expand

lunch menu in bid to draw us diners

01/22/15: Starbucks first quarter profit

surges 82% as food sells gain

04/23/15: Starbucks sales exceed

estimates after customer traffic grows

7/24/15: Starbucks profit tops

estimates as sales in the Americas

climb

Source: Bloomberg

Investment Strategy____________________________________

We issue a BUY recommendation for Starbucks with a target price of $63.25

USD, an average of the three valuation prices calculated using DCF (FCFF and

FCFE) and DDM. A historical Chart of stock price is shown below (Chart I):

Strong Financial Position and Dividend Growth

Based on the projected financial reports and ratios, Starbucks is in a sound financial

position. With a high rate of liquidity, the firm should be able to offset any future

unexpected negative shocks. In addition, Starbucks’ dividends per share has been

increasing steadily in the last 4 years, accumulating a growth rate of 150% over the

period. We project that Starbucks’ dividend will increase in the near future, due to its

below-average dividend yield.

Optimistic Outlook in China and Pacific Region

As we begin to see a slowdown in the EMEA and America regions, Starbucks’ strategy

to expand into the China and Pacific region provides the company with an optimistic

future. Specifically, China has grown exponentially in recent years and with more store

openings in this region, Starbucks’ revenue in this region will increase.

Sensitivity Analysis

A summary of our sensitivity analysis, as shown in Table 1, supports our buy

recommendation. In the case of our DCF valuations, we calculated the intrinsic price

by adjusting the cost inflation and revenue growth by +/- 5%. For our DDM analysis,

we adjusted the dividend growth rate and required rate of return by +/- 1% and +/-

0.1% respectively. In all cases, the valuation price is still above the current market

price of $57.26.

Table 1. Sensitivity Analysis



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Figure 5. Revenue Growth Rates


Valuation_____________________________________________

Two industry-wide standard approaches were used to derive the intrinsic value of

SBUX –Discounted Cash Flow (DCF) model and Dividend Discount Model (DDM).

DCF Valuation

Based on our DCF valuation model (Appendix E), the intrinsic value of SBUX

calculated using the Free Cash Flow to the Firm (FCFF) method is $63.20. Similarly,

using the Free Cash Flow to Equity (FCFE) method, we calculated an intrinsic value

of $62.42. The valuation is based on the below assumptions:

Revenue Growth Pattern - A ten year model is built based on the historical

performance. The revenue forecast is divided into 5 different segments: Americas,

EMEA, CAP, Channel Development and All Other. According to the Starbucks 2012

to 2015 Quarterly report, there are different patterns for all segments (Figure 5).

Americas was showing steady growth, while EMEA was more flat. CAP was showing

high growth rate comparatively. The Channel Development and All Other segments

were more in line with the Americas. Therefore, three different growth patterns are

implemented: Americas, Development Channel and All Other Segments followed a

stable growth for the next 5 years at 6%, and decline to 3%; EMEA shows the flat rate

growth at 3%; CAP starts at high growth rate of 15% for 5 years and decreasing to the

terminal rate at 4% (Figure 6).

Cost Growth Pattern – Cost was divided into two different categories: Variable Cost

and Fixed Cost.

Variable Cost is projected based on the revenue growth pattern, assuming the cost

is proportional to the sales. However, the blended rate was used instead of the

separated segment rate, as we assumed that Starbucks has one main supply source.

The calculation of the blended rate will be explained separately.

Fixed Cost is calculated based on the blended inflation rate from the different

segments (Figure 7). The Fixed Cost is predicted to be in line with the area

inflation, and the IMF’s forecast6 was used for the inflation prediction.

Initial Revenue Growth Rate – The initial revenue growth rates are determined by the

historical average growth rate of each segment, adjusted by the future expansion plan

from management team. According to Table 2, the main driver for the growth rate in

each segment is different:

Americas segment is showing balanced growth in both transactions and ticket size,

4% and 2% respectively. Both the new store opens and spending in each

transaction contributed to this. However, the future expansion plan is focusing on

CAP segment, therefore the prediction for the future growth is set at 6%, with 4%

in transaction growth and 2% from ticket.

EMEA segment shows slow growth in transactions and no growth in ticket size. It

is confirmed with the slow growth in Euro zone due to Debt Crisis. The solution

is still unclear at the moment and we project an initial revenue growth rate of 3%.

Figure 7. Cost Growth Rates


0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Starbucks Cost Inflation Model

Americas Cost Inflation

EMEA Cost Inflation

CAP Cost Inflation

Channel Development CostInflation

Other Cost Inflation

Blended Cost Inflation

Table 2. Initial Revenue Growth


Figure 6. Projected Revenue Growth

Rates



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CAP segment shows strong two-digit growth, mainly driven by the aggressive

expansion into the China market. The management’s expansion plan for 2015

confirmed the future trend and the initial rate is projected to be 15%.

Development Channel and All Other Segments are expected to be in line with

Americas, because of the dominate market size.

Terminal Growth Rate – As Starbucks is saturating the market and more competitors

are entering into this sector, the growth rate will slow down. The Terminal Rate is

determined by adding a premium to the inflation rate. For all segments, except CAP,

1% is added to the long-term inflation, resulting at 3%. As for CAP, the main market

is China, a developing country with higher inflation and growth rate. The premium is

set at 2%, resulting at 5% for terminal rate.

Weighted Average for Blended Rate – The weighted average method was used for

blended rate calculation. Each segment is assigned with a weight, based on its sales

percentage on the total revenue (Figure 8). The weight of each segment changes based

on our projections (Figure 9). The dependence on the CAP segment increases, while

the reliance of the Americas market is decreasing.

CAPEX Projection – It is crucial for any business to grow continuously by planning

Capital Expenditures. There are two important components for CAPEX Projection:

Maintenance CAPEX and Strategic CAPEX. In this model, it assumes that the

Maintenance CAPEX to be at average $15,000 per existing stores and increases with

blended inflation rate. Strategic CAPEX is estimated at $600,000 per new store set up

and increases with blended inflation rate. The numbers are estimated from the

historical data. The new store increases at the blended revenue growth rate. (Figure

10, Appendix E)

Weighted Average Cost of Capital (WACC) – The cost of equity for Starbucks,

calculated using CAPM, is 6.26%. Based on the current yield of a 10-year US

government bond7, the risk-free rate is 2.13%. Starbucks’ beta of 0.8 is based on

regression against the last five years’ month-end S&P 500 closing prices8. However,

to more accurately determine Starbuck’s cost of equity, we used an adjusted beta of

0.87 (Appendix E). Lastly, for consistency with the risk-free rate in terms of investment

horizon, we used the 10-year average of the S&P 500 as the market rate, 6.9%9. The

after-tax cost of debt was calculated based on the yield-to-maturity of the firm’s newly

issued Senior Notes due 2045, as it would more accurately represent the long-term

investment horizon10. Based on the market value-weight capital structure as shown in

Appendix E, the WACC is 6.14% (Table 3).

DDM Valuation

Starbucks’ cash dividend records show a consistent quarterly payout to its shareholders

since they first began issuing dividends in 2010, representing a history of returning

cash back to its shareholders. The firm has steadily increased their yearly dividend per

share, including increases of 23.08% and 23.81% in the last two years (Appendix F).

As such, the dividend discount model is an appropriate model to valuate Starbucks.

Based on the following assumptions, the DDM calculates an intrinsic value of $64.05,

which supports our BUY recommendation (Appendix F).

Figure 8. Sales Weight by Region


Table 3. WACC

Starbucks WACC

Risk-free rate 2.13%

Beta 0.87

Market risk premium 6.90%

Cost of equity 6.26%

Cost of debt 4.26%

Tax Rate 35%

After-tax cost of debt 2.77%

Weight of equity 96.41%

Weight of debt 3.59%

WACC 6.14% Sources: Company Data, External Data

Figure 9. Projected Sales Revenue

Weight


Figure 10. Capex Projection



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Dividend Growth Rate (Figure 11) – We assume Starbucks’ dividend growth rate

will grow initially at 25.3% for 3 years, which is the average yearly increase over

the last five years. This high growth rate is reasonable, as Starbucks’ current

dividend yield, 1.18%11 is lower than the industry average of 2.33%12. The growth

rate will then linearly decrease for the next 6 years until it reaches the terminal

growth rate of 3.2%, discussed above.

Required Rate of Return – Our required rate of return is based on our calculated

cost of equity of 6.26%, as discussed in the WACC section.

Financial Analysis_____________ ___________________


Stable Profit Margins in Short-Term, Substantial Growth in Mid-Term

Starbucks’s forecasted revenue is increasing over the next 10 years (Figure 12). Based

on our assumptions, the blended growth rate is generated from different segments, by

assigning weights corresponding to the composition of total revenue by segment. In

the short-term (from 2015 to 2018), Americas segment is still the largest market for

Starbucks. We forecast the revenue will grow at a stable pace. As China Asia and

Pacific segment expands at a much higher rate, we expect this segment to become an

influential profit generator for the company. As a result, we forecast EBITDA margin

to surge, from 22.11% to 25.16%, in the mid-term (from 2018 to 2023). After a period

of high expansion in CAP segment, the growth rate stabilizes as the market matures.

Other strong indicators for Starbucks’s profitability are increasing EPS and operating

cash flow per earning in our forecasted period (Figure 13). Favourable CFO/earning

suggests that the operating is efficient and the business is profitable.

Figure 11. Dividend Growth Rate

Sources: Company Data, Team Estimates

0%

10%

20%

30%

2016 2019 2022 2025

Figure 12. Forecasted Margins


Figure 13. Earnings and CFO Per Share



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Figure 16. Estimated Investment Risks


Pro

bab

ility

Impact

Estimated Investment Risks

Volatility of Coffee Price Foreign Exchange FluctuationSlow Down in Economy Dependence on CAPDeterioration of Brand Value Industry Competition

Liquidity

Starbucks’s projected current ratio and cash ratio rise steadily (Figure 14). This is due

to Starbucks holds large balance of cash and less amount of debt in its balance sheet.

The ratios imply that the company has financial flexibility to service its debt and

respond to one-time negative event that may adversely affect its business.

ROE Decomposition

Our analysis indicates that ROE declines in our forecasted period from 28.27% to

14.02% (Figure 15). At first glance, the result is considered poor. However, our DuPont

analysis displays a more comprehensive picture. The profit margin is healthy and

exhibits a consistent and steady trend. The main driver of the decline is the reduction

in financial leverage ratio, calculated as assets divided by equity. Starbucks’s net

income is projected to be steady over the next 10 years. However, equity increases at

an accelerated rate based on our assumption that dividend payout ratio still maintains

at current level, 20%. We anticipate that Starbucks will distribute more dividends to

shareholders in the future based on its strong forecasted financial position. We also

expect Starbucks may perform acquisitions, undertake shares buy-back program, and

take advantage of investing in more projects to enhance company’s growth

opportunity.

Figure 15. Projected ROE Decomposition


Investment Risks_______________________________________

Starbucks’ investments risks include: market risk, economic risk and operational risk

(Figure 16).

Market Risk

Volatility of Coffee Price10 – Profitability depends on factors beyond Starbucks’s

control. Price of coffee is volatile to weather, natural disasters, cost of production, and

economic and political conditions in the producing countries. Severe weather condition

can damage the crop growth, which leads to price surge in coffee. In addition,

speculation on coffee commodity can impact coffee prices. Export quotas and tariffs

in different regions can influent price in an unfavorable manner. Starbucks’s strategy

of setting fixed coffee price for a longer duration with suppliers reduces uncertainty

and secure sufficient supply. Apart from that, Starbucks also maintains healthy

relationships with suppliers.

Fluctuations of Foreign Exchange Rates – Strengthening of the US dollar against

major currencies partially offsets increase in revenues from stores in other countries.

Figure 14. Projected Liquidity Ratios



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Economic Risk

Slow Down in Economy11 – Macroeconomic conditions affect the demand for high-end

coffee. Customers with less disposal income during economic downturn may consume

less of Starbucks’s coffee or substitute to lower-priced competitors’ products, which

result in decrease in company’s revenue. In the case where economic slump continues

for a longer period, consumers may not adjust their purchasing behavior and loss in

revenue becomes permanent14.

Dependence on CAP Operating Segment – Starbuck’s future growths heavily depend

on the growths in CAP operating segment. Particularly, its market business units in

China and Japan contribute materially to earnings in the segment. Under uncertain

future Chinese economy condition, Starbucks may overestimate the growth rate of

disposable income in the country, resulting the estimated growth in that segment is not

sustainable. Operational costs can be higher than expected in these countries.

Moreover, customers’ tastes are varied in different regions in the world, which lowers

consumption than company’s expectation.

Operational Risk

Deterioration of Brand Value – As a recognized global high-end coffee chain,

preservation of Starbucks’s brand value is crucial. Customers expect to experience

same quality of beverages and services in any stores in the world. Starbucks has less

control in performance of its licensed stores in different regions, which may result in

negative impact on brand value and revenue.

Severe Competition in the Industry – Starbucks faces severe competition in this

saturated industry. Product innovation comprises a significant part in product

differentiation in the market and future growth of the company. New products launches

and development of channels may not be implemented as successfully as expectation.

In the case where costs and customer’s acceptance are not achieved as desired,

company’s business may be negatively affected.


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Appendices

Appendix A: Starbucks’ Executive Management

Appendix B: Starbucks Corporation – Projected Income Statement

Name Age Profile

Howard D. Schultz

(CEO)

62 Mr. Howard D. Schultz serves as the Chief Executive Officer, President, and Chairman

of Starbucks Coffee Singapore Pte. Ltd. Mr. Schultz founded Starbucks Corporation in

1985. He is a Co-Founder and Partner of Maveron LLC and serves as its Member of

Management Board.

Scott Harlan Maw (CFO

and EVP)

48 Mr. Scott Harlan Maw has been the CFO and EVP of Starbucks Corporation since

February 3, 2014. He also served at various capacities in different multinational including

but not limited to Seabright Insurance Holdings, JP Morgan Chase, Washington Mutual,

General Electric etc.

Clifford Burrows

(Group President of U.S.

Americas and Teavana)

56 Mr. Clifford Burrows has been the Group President of U.S., Americas at Teavana

Holdings, Inc., since February 2014. He had served as president of EMEA and also with

a lot of experience and education from the United Kingdom.

Jeffery J. Hansberry

(President of Evolution

Fresh)

51 Mr. Jeffery J. Hansberry has been the President of Evolution Fresh at Starbucks

Corporation since September 29, 2014. His prior experience include but not limited to

Procter & Gamble, E & J Gallo etc.

John Culver

(Group President of

China & Asia Pacific,

Channel Development

(CPG) and Emerging

Brands)

55 Mr. John Culver has been the Group President of China & Asia Pacific, Channel

Development (CPG) and Emerging Brands at Starbucks Corporation since May 2, 2013.

He has been a Director of Starbucks Coffee Japan, Ltd. June 2007. He served as a Director

of International Foodservice Manufacturers Association (IFMA) as a member and as

treasurer.


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Appendix C: Starbucks Projected Balance Sheet

Appendix D: Starbucks Corporation – Projected Cash Flow Statement


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Appendix E: Discounted Cash Flow (DCF) Valuation

DCF Analysis

Capex Projections

Weighted Average Cost of Capital (WACC)

[i] 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐵𝑒𝑡𝑎 = 2

3(0.8) +

1

3 (1) = 0.87

[ii] Equity and Debt Weights: The weight of debt was based solely on the market value of long-term bonds, to better reflect

the long-term investment horizon. As of the 2014 fiscal-year end, the market value of the long-term bonds, as of September

2014 is $2,164 million (Starbucks 2014 Financial Report, page 69). The market value of the newly issued-bonds are assumed

to be at book-value of $850 million. Therefore, the total market value of long-term debt is $3,014 million. Based on

Starbuck’s closing-price on September 4, 2015 of $54.28, the total market value of equity is $80,291 million.

Market Value-Weighted Capital Structure

MV of long-term debt (in millions) $3,014 3.59%

MV of equity (in millions):

Market Price = $54.28

Number of Common Shares Outstanding = 1,490,800 $80,921 96.41%

Appendix F: Dividend Discount Model (DDM) Valuation

Our DDM model is a 10-year model based on the 3-stage model. The growth rate in the first-stage is based on the average

yearly increase in dividends of the last 5 years. Then, it will slowly decline to the terminal growth rate of 3.2%, as estimated.

The historical dividends per share below are adjusted to reflect the stock split announced in March 2015.


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Also, we assume that 2010’s dividends per share (DPS) is the dividends paid in the 4th quarter of 2014 plus the dividends

paid in the first 3 quarters of 2015. The dividends for the subsequent years follow similarly.

Year DPS Dividend Growth Rate

2010 $ 0.115*

2011 $ 0.26

2012 $ 0.34 30.77%

2013 $ 0.42 23.53%

2014 $ 0.52 23.81%

2015 $ 0.64 23.08%

Average 25.30% DDM PV

2016F $ 0.80 25.30% $ 0.75

2017F $ 1.00 25.30% $ 0.89

2018F $ 1.26 25.30% $ 1.05

2019F $ 1.54 22.14% $ 1.21

2020F $ 1.83 18.98% $ 1.35

2021F $ 2.12 15.83% $ 1.47

2022F $ 2.39 12.67% $ 1.56

2023F $ 2.61 9.51% $ 1.61

2024F $ 2.78 6.36% $ 1.61

2025F $ 2.87 3.20% $ 52.55

*Only represents the dividends paid in 2010 Quarter 2 and Quarter 3, as the 2nd quarter of 2010 was the first time Starbucks

issued dividends.

Other Key DDM Elements

Cost of Equity 6.26%

Terminal Value (in 2025) $93.61

Intrinsic Value $64.05


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References

1Starbucks Corporation. http://www.starbucks.com/ (2015)

2Starbucks Corporation, Fiscal 2014 Annual Report. http://investor.starbucks.com/ (2015)

3World Bank, Bloomberg, Haver Analytics, Federal Reserve St. Louis, U.S. Federal Reserve Board. (2015)

4Franchise Help, Industry Reports. https://www.franchisehelp.com/industry-reports/industry-information/ (2015)

5McDonald’s Corporation. http://www.mcdonalds.ca/ca/en/our_story/our_history.html. (2015)

6Knoema, Inflation Forecasts 2015-2020. http://knoema.com/yrbmclg/china-inflation-forecast-2015-2020-and-up-to-2060-

data-and-charts. (2015). Accessed September 7, 2015.

7U.S. Department of the Treasury. http://www.treasury.gov/resource-center/data-chart-center/interest-

rates/Pages/TextView.aspx?data=yield. (2015). Accessed September 7, 2015

8Google Finance, Starbucks: SBUX. https://www.google.ca/finance?cid=655693. (2015). Accessed September 7,

2015.

9Morningstar, S&P 500. http://quicktake.morningstar.com/index/IndexCharts.aspx?Symbol=SPX. (2015). Accessed

September 7, 2015.

10Morningstar, SBUX Bonds. http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=sbux. (2015).

Accessed September 7, 2015.

11YCharts, Starbucks Dividend Yield (TTM). https://ycharts.com/companies/SBUX/dividend_yield. (2015).

Accessed September 7, 2015.

12Dividend Reference, Consumer Discretionary Dividend Stock. http://dividendreference.com/data/sector/consumer-

discretionary/ (2015). Accessed September 7, 2015.

13NASDAQ, Why Starbucks has an Edge Over Competitors Despite Rising Coffee Prices.

http://www.nasdaq.com/article/why-starbucks-has-an-edge-over-competitors-despite-rising-coffee-prices-cm358945.

(2014).

14Starbucks Corporation, Fiscal 2014 Annual Report. http://investor.starbucks.com/ (2015)

Note: Other statistics and figures were extracted from Bloomberg and the Starbucks Corporation, Fiscal 2014 Annual

Report.


17 | P a g e

Disclosures:

Ownership and material conflicts of interest:

The authors, or a member of their household, of this report do not a financial interest in the securities of Starbucks

Corporation.

The authors, or a member of their household, of this report do not know of the existence of any conflicts of interest

that might bias the content or publication of this report.

Receipt of compensation:

Compensation of the authors of this report is not based on investment banking revenue.

Position as an officer or director:

The authors, or a member of their household, do not serves as an officer, director or advisory board member of the

subject company.

Market making:

The authors do not act as a market maker in the subject company’s securities.

Ratings guide:

Banks rate companies as either BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver

absolute returns of 10% or greater over the next twelve month period, and recommends that investors take a position

above the security’s weight in the S&P TSX index, or any other relevant index. A SELL rating is given when the

security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns

over the next twelve months.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and

believed by the authors to be reliable, but the authors do not make any representation or warranty, express or implied,

as to its accuracy or completeness. None of the information was obtained or plagiarized from investment reports

produced by "any and all" outside sources. The information is not intended to be used as the basis of any investment

decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a

solicitation of an offer to buy or sell any security.

Documents

MFIN 823 - Starbucks Research Report