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Add a Little Flavor With Starbucks

Presented by: Chris Huynh Philip Chiang Anthony Vu Phuong Nguyen Phuong Doan Vanessa Chiang

Mission Statement

Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.

The Creation of StarbucksThe 1980s o Howard Schultz, the founder of Starbucks, traveled to Italy to learn of popularity of espresso bars o After returning to the United States, Schultz convinces Starbucks to test the coffee bar concept in Seattle o Total number of Starbucks locations: 55

Starbucks become a hitThe 1990s o Completes IPO with common stock being traded on the Nasdaq with the symbol SBUX o Starbucks begin their fabled partnership with Barnes & Nobles to establish Starbucks in every Barnes & Nobles book store o Total number of Starbucks location 2,135

The Success of StarbucksThe 2000s o Started a partnership with T-Mobile to launch their Thighhigh-speed wireless internet service in more than 1,200 stores o Opens Starbucks Coffee Agronomy Company in San Jose, California o Current number of stores: 7,225

Leaders of StarbucksFiscal Year Salary 1,132,762 1,088,269 995,192 1,132,762 1,088,269 995,192 400,000 63,077

Orin C. Smithpresident and chief executive officer

2003 2002 2001 2003 2002 2001 2003 executive vice president, Partner Resources 2002 2001

Howard Schultzchairman and chief global strategist

David A. Pace

ConclusionBased on some of the positions in the Board of Directors, Starbucks is not a family business. They only hold 5% of Starbucks total stock.

EverEver-expanding Businesso

You can now get your Starbucks fix anywhere from: Your

local grocery stores Airports across the United States Any Hyatt hotel Universities campuses

Taking over the worldo

Starbucks goes international with stores opening up in over 34 countries like: China Turkey Japan Canada Peru

Total number of International stores: 1,680

Revenues from Starbucks85%

O erate Reta Stores S ecaty O eratons15%

Where Does it Come From?pe i it per tio sRo ties

Ret i

per tio sCo ee

27

39

Gro er es Li e si Ri hts P rt erships E Commer e

2

Food Items Co ee Be Co ee Eq ip. 7

2

Financial RatiosGrowth Ratios Sales EPS (Qtr.) Price Ratios Current P/E Price/Sales Profit Margins Growth Margin PrePre-tax Margin 58.3 11.2 58.4 10.7 47.8 Fair 10.4 Fair 52.9 3.56 57.0 3.69 23.6 Poor 1.61 Poor Starbucks 27.7 38.6 Industry 27.3 37.4 S & P 500 Assessment 8.8 Strong 610.2 Fair

Financial Ratios ContinueFinancial Conditions Current Ratio Quick Ratio Investment (%) ROE ROA Mgmt Efficiency Inventory Turnover Receivable Turnover 7.0 37.2 6.0 37.7 8.1 Poor 5.6 Poor 13.4 9.8 13.0 9.9 13.7 Fair 2.2 Fair Starbucks 1.6 1.0 Industry 1.5 0.8 S & P 500 Assessment 1.6 Good 1.2 Fair

Holding eriod ReturnHolding Period Return 2004 (3/31) 2003 2002 2001 2000 Earnings Growth Est. Dividends Average Price HPR 0.314 0 37.6 0.46 0 25.76 0.113705 0 23.13 0 19.35 0 44.81

0.195349 -0.052

ConclusionHolding Period Return increased from .11 to .46 in 2003. Starbucks has had a positive Holding Period Return since 2002.

Risk Anal sis2004 Unlevered Beta [Equity/(Equity +((1-T)Debt))]* BetaEquity=Beta_unlevered Equity Debt Income from continuing operations before income taxes Provision for income tax Tax rate Beta SBUX Beta= COV(RIBM, RS&P500)/VAR(RS&P500) 0.236617495 2,082,427 647,319 436,335 167,989 0.385000057 0.17175624 1,723,189 491,203 338,999 126,313 0.372605819 0.784023358 1,375,927 475,112 288,047 107,712 0.373938975 0.842363146 2003 0.144190999 2002 0.665079471 2001 0.692629823

ConclusionBeta (Systematic Risk) 2004: .2366 o Unlevered Beta 2003: .1441o

Beta has increased since 2004 even though in 2003, Beta dropped from .78 to .17.

Discounted Cash Flow and.Ke(Discounted cash flow (DCF) model) P0=(FCFE1/Sh ares0)/(Ke0-G1) ke0=[(FCFE1/s hares0)/P0] +G1 G1=(FCFE1FCFE0)/FCFE0 FCFE 12/31/2004 shares outstanding G 03/31/2004 2004(1/31) 215,936,190 2003 164,335,000 2002 -102,887,000 2001 -27,545,000

3,937,000,000 0.314

393,692,536 -2.597237746

388,228,592 -2.735233255

380,044,302 0.684810967

P 1/31/2004 Ke(required return on equity)

32.9

25.76

23.13

19.35

0.330671

0.3352922

-2.578937

-2.7492241

CA M2004(1/31) .Ke (CAPM) Ke= Rf + Beta(RmRf) 2003 2002 2001 2000 Rf 0.009 0.01 0.0163 0.0386

Rm-Rf

0.0133

0.3206

-0.2261

-0.1511

Beta

0.2366174

0.1717562

0.7840233

0.8423631

Ke(required return on equity)

0.012147

0.065065

-0.160961

-0.088681

ConclusionSince Starbucks does not pay dividends to their stockholders, the DCF analysis (.33%) is not a good measurement for Starbucks. CAPM (1.21%) is a better measurement for Starbucks.

Evaluation of SBUX2003 We= Equity/(Equity+Debt+Preferred Stock) Wd=Debt/(Equity+Debt+Preferred Stock) Wp=Preferrd stock/(Equity+Debt+Prefer red Stock) Ke Kd Kp WACC=We* Ke + Wd*kd*(1T)+ Wp*Kp 0.762865 0.237135 2002 0.778177 0.221823 2001 0.743327 0.256673

0 0.08 0.056 0

0 0.076 0.05 0

0 0.14 0.12 0

WACC

0.069196

0.0661

0.123349

ConclusionWith a decrease from 2001 to 2002, the firm has increased their value: stating the lower the WACC means the greater the firm value

200 Capital Structure24e t uit

6

MM roposition0 053 0 052 0 051WACC

0 05241

0 05 0 049 0 048 0 047 0 046 0 23 0 22D/TA

0 04901 0 0482

0 25

Based on the chart, Starbucks belongs to Model 3. There is a 22% optimal capital structure based on a three year analysis. A ten year analysis would provide better accuracy.

Market Efficienc4/8/2004: Announced plans to create an alcohol coffee with Jim Bean to be sold at restaurants. (No Form)

4/8/2004: 39.14 4/12/2004: 39.20 4/13/2004: 38.48

Market Efficienc3/31/2004: Alan Greenspan, Chief Executive to the Federal Bank is rumored to be ill. (No Form) 3/31/2004: 38.87 4/1/2004: 38.23 4/2/2004: 39.30

Five Year rice ndex

By looking at the five year price index you can see that the stock prices of Starbucks fluctuate a lot. In September of 2001 it suffered a large decline due to the terrorist attacks. At the moment, Starbucks is currently experiencing its highest stock prices.

What to do

Recomm endations

Current

1 Month Ago

2 Months Ago

3 Months Ago

Strong Buy Moderate Buy Hold Moderate Sell Strong Sell Mean Rec.

4 1 9 1 0 2.47

4 1 9 1 0 2.47

4 1 9 1 0 2.47

4 1 9 1 0 2.47

Strengths and Weaknesseso o o o o

Holding Period Return is POSITIVE Revenues have grown over 24% in 2003 Capital Structure is STABLE Low Debt Ratio Stock Scouter rates Starbucks 9 out of 10

o o o

Never paid a dividend Price Ratios are poor Beta increased since 2002

In ConclusionThe group decided that people should Hold or Moderately Buy Starbucks since HPR is expected to increase and that Starbucks is underpriced.