Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie College of Business Jack Simpson [thomasjohnbatten-simpson@uiowa.edu] STARBUCKS CORPORATION (SBUX) March 5, 2020 Consumer Discretionary – Retail Coffee Market Industry Rating BUY

Investment Thesis Target Price $85-95 We currently recommend a BUY for Starbucks. Starbucks has seen strong revenue growth with a most recent 5-year average of 8.41%. We believe Starbucks will be able to continue growing as the company pushes into emerging markets with a focus on Asia. The retail coffee industry has also seen a large shift in consumer preference towards more specialty coffee beverages, which continues to position Starbucks perfectly in the industry going forward against its peers. For these reasons we recommend a BUY and forecast around a 20% upside from the current price. Drivers of Thesis • We believe that Starbucks will continue to have strong growth above industry

averages. We forecasted a CAGR of 5.61% over our forecast period • Starbucks has significant opportunities to cut costs and increase their margins.

We believe Starbucks will be able to improve operating margin from 15.4% in 2019 to 20% over the next five years. Although this jump seems high, Starbucks has had a 5-year historical margin of 18.2%

• Consumer preferences have shifted towards higher-end specialty coffee beverages which retailers have higher margins on individual sales

Risks to Thesis • Starbucks saw their operating margin decline significantly from 19.57% in

2016 to 15.38% in 2019. Although we believe this was due to their rapid expansion in store openings, if the company is not able to improve their margins it will have negative effects on our valuation

• Lower consumer confidence and economic stability will push customers away from higher-end coffee and back to regular coffee which will dent revenue growth for Starbucks and coffee retailers

• We believe Starbucks growth in Americas will slow. If the company is not able to increase same store sales growth our target price will be lower.

• Starbucks will have to expand internationally to continue growing at higher rates than competitors which will expose them to more regulatory and international concerns.

Henry Fund DCF Henry Fund DDM Relative Multiple

$97 $96 $83

Price & Earnings Data Current Price 52wk Range EPS 2019 EPS CV

$76 $69 - 99

$2.95 $4.15

Key Statistics Market Cap (B) Shares Outstanding (M)

$89.42 1221.2

Five Year Beta Dividend Yield Price/Earning (FY1) Price/Sales (FY1) Profitability Metrics Operating Margin 2019 Operating Margin CV Profit Margin 2019 Profit Margin 2020

0.89 1.64% 32.5x

3.8x

15.38% 23.58% 13.58% 16.86%

12 Month Performance Industry Description

Starbucks Corporation operates as a roaster, marketer, and retailer of specialty coffee around the globe. Along with purchasing and roasting high-quality coffee products, the company also sells tea’s, other beverages, food, and consumer packaged Starbucks products. The company operates in three different segments: Americas, International, and Corporate & Other. The company operates on a business model that includes both companies operated stores, as well as licensed stores. Company operated stores generate higher revenues but have lower margins than licensed stores.

Earnings Estimates

Year 2017 2018 2019 2020E 2021E 2022E EPS $1.99 $3.27 $2.95 $2.8 $3.18 $3.72

growth 4.19% 64.32% -9.97% -5.17% 13.64% 17.07%

30.0

21.4

3.8

27.4

19.6

7.7

26.2

19.4

4.60

10

20

30

40

P/E EV/EBITDA P/S

SBUX MCD DNKN

-10%

0%

10%

20%

30%

40%

M A M J J A S O N D J F

SBUX S&P 500

Source: FactSet & Company 10K’s

Source: Yahoo Finance Historical

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EXECUTIVE SUMMARY We recommend a BUY for Starbucks corporation with an upside of 20% from its current price. Starbucks is the industry leader in the retail coffee market with the highest market share. Starbucks has seen strong growth over the last five years as consumers have started consuming more coffee and changing their preferences to higher-end specialty coffee which Starbucks has been able to capitalize on. We have forecasted an annual average growth rate of 5.61% over the next five years. We believe that Starbucks will start focusing more on international growth as the Americas market is becoming very concentrated. We also believe that Starbucks will be able to continue improving their margins as the company increase the number of licensed stores as a percentage of total stores. We project that operating margins will increase from 15.38% in 2019 to 20% in 2024.

COMPANY OVERVIEW Starbucks Store Breakdown Starbucks has two different types of stores including “Company Operated” or “Licensed”. Each type of store has various different advantages and disadvantages. The following chart illustrates Starbucks store breakdown.

Source: Company 10K We have projected Starbucks will continue to shift to a more licensed store business model in our forecast period. In order to continue growing, we believe that

Starbucks will continue to push to open more company operated store internationally in order to increase their brand quality overseas. However, we believe that the retail coffee industry is have very modest growth in Americas and the company will slow it store count growth in this region. Due to the maturity in the America’s market, we believe that Starbucks will begin the switch to more licensed store in this region due to higher margins on these stores. This is a reasonable to assume as companies begin focusing on margins to increase profitability in mature markets. For these reasons, we have projected that Starbucks will reach 52% of licensed stores by 2024. Revenue Breakdown The following pie chart demonstrates the percentage of revenue broken down by store type. 80% of Starbucks revenue in 2019 came from company operated stores. However, 49% of the total stores were licensed.

Source: Company 10K

OPERATING SEGMENTS Revenue For revenue growth, we have further broken-down total revenue by segment which includes Americas, International, and Corporate & Other. These segments were further divided by the number of company operated and licensed stores in each region. The

80%

11% 9%

2019 Revenue Breakdown by Stores

Company StoreRevenue

Licenced StoreRevenue

Other

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following pie chart demonstrates the percentage of revenue by region.

Source: Company 10K Although Americas represented 69% of company revenue in 2019, we expect that International revenue will continue to grow as a larger percentage, taking share away from America. We believe that international revenue will represent 27% of Starbucks total revenue in 2024, up from 23% in 2019.

Source: Company 10K Americas Americas represent Starbucks largest region by revenue. Starbucks has had strong growth in this segment as the company continued to open new stores, including both licensed and company operated. We forecasted growth in this region to continue in our projection period. However, we have projected slower growth than the historical five-year average. This is due to the domestic market becoming very saturated and competitive. We believe that Starbucks is nearing

their peak growth in the Americas region and growth will start to slow over the five-year forecast period. We have projected growth of 9.7% in 2020 but expect growth to slow each year after before falling to 2.1% in our CV year which is right in line with Henry Fund long-term GDP forecasts. International Starbuck’s International segment is their highest growth segment as the company has put an emphasis on expanding internationally. We believe that Starbucks will continue to have the highest growth in this region going forward. Management has expressed their future growth strategy and has targeted International expansion. We have forecasted 10% percent growth in 2020. We revised our 2020 growth expectations to be lower from other analyst projections for the year due to slowing global growth and recent worries of coronavirus which has caused Starbucks to temporarily close stores in China due to the outbreak. Although we do not believe these effects to be dramatic, we do believe that the virus will cause revenue, especially in this region, to be lower than previously expected and have built this in out model. For our second forecast year, we have forecasted growth of 10.9% as we believe the company will grow more rapidly after the outbreak. Each year following thereafter, we believe revenue growth will start to slow as the international market becomes more competitive and saturated among many different players. Product Sales Breakdown The largest portion of revenue by product for Starbucks comes from their beverages. 74% of revenue came from beverages with the majority being coffee products.

69%

23%

8%

2019 Revenue by Region

Americas

International

Corporate

66%

27%

7%

2024 Estimated Revenue By Region

Americas

International

Corporate

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Source: Company 10K We believe going forward, Starbucks will begin pushing more food products into their stores in order to better compete with other on the go chains. Over time, we believe that total food revenue will increase as a percentage of total revenue with less revenue coming from beverages. We believe this will continue diversifying the company as Starbucks begins offering more products for customers. Operating Margins We have forecasted a gradual increase in operating margin starting in 2021. We believe that the operating margin of Starbucks will increase from 15.4% to 20% in 2024. The following will outline the specific reasons why we believe Starbucks will be able to increase margins: Economies of Scale: Starbucks will be able to naturally increase margins as the company continues to grow. As the company gets bigger, Starbucks will have a larger customer base and more store locations which will help naturally lower SG&A and Other Operating Expenses as the costs per store will decrease. Going Green: We believe that as Starbucks continues to focus on being eco-friendlier, the company will be able to lower their COGS. The company has started to focus on reducing their plastic waste as well as encouraging customers to bring their own cup for a discount on coffee. As customer begin bringing their own cups more often, Starbucks receives higher margins on these sales as it eliminates the need for

plastic or paper coffee cups in COGS on those purchases. Leveraging Size: Starbucks will be able to continue utilizing their size to increase margins. We believe as Starbucks continues to grow, they will be able to utilize their size through purchasing in larger quantities and reducing their COGS. Historical Trends: Although 2019 saw an operating margin of 15.38%, the previous 4-year average operating margin was 18.2%. In 2018 and 2019, Starbucks put a large emphasis on growth by opening many new stores and saw their margins decrease as a result. Thus, the jump to an operating margin of 20% by 2024 is reasonable to assume. Business Model: Starbucks is starting to shift to more Licensed Stores which have higher margins. We believe that as growth continues to slow Starbucks will begin shifting to more licensed stores which have higher margins. Target Market Starbucks has been able to stay ahead of customer trends through strong product innovation and understanding of customers preferences. Starbucks targets customers who value quality coffee. This differs from many of the top competitors who target the value coffee market as opposed to higher end coffee types. On top of products, Starbucks has stayed up to date on leading edge technology including mobile online ordering through their applications, as well as Uber Eats. Overall, we believe that Starbucks true target market is on consumers of the millennial age and Gen Z age. The following chart outlines the prices that people are willing to pay for a small cup of coffee by age group.

74%

20%

1% 5%

2019 Retail Sales by Product Mix

Beverages

Food

Packaged products

Other

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Source: Statistica As you can see, the younger generation, specifically the 18-29 age group was very willing to pay over $5 for a small cup of coffee. Compared to the younger generation, the 60+ age just wants to pay $1 for a cup of coffee. In general, this demonstrates that the older generations do not see value in premium coffee, but the younger generation does. We believe this signals the changing consumer preferences and demonstrates how to retail coffee industry is positioned to continue adapting to more specialty coffee. This preference of younger consumers to pay more for specialty coffee will help Starbucks to increase their operating margins going forward.

RECENT DEVELOPMENTS Strategic Partnerships In 2018, Starbucks announced a partnership with Nestle which gave them the full rights to market & sell Starbucks consumer packaged goods (CPG) products. The deal was valued at $7.15 billion which Starbucks will realize over 40 years. We believe this deal will help Starbucks expand their brand name while allowing Starbucks to focus more of store sales growth. Q1 2020 Earning Analysis Starbucks had a strong quarter for the period ended December 29, 2019. Some of the report highlights include: • EPS: $0.79 vs. $0.76 expected • Revenue: $7.1 billion vs. $7.1 billion expected

• Global same-store sales growth: 5% vs. 4.4% expected

However, more important to the earnings release was future guidance on the effects of COVID-19 and how the virus has already affected the company. Starbucks warned that the Coronavirus could “materially affect” end of year 2020 financial results. The company stated they did not have a clear enough picture into the future to give guidance as the situation depends on the duration and potential magnitude of the virus. What we do know at this point is the coffee chain has temporarily closed stores in China and is monitoring all other regions on a daily basis. Debt Analysis Historically, Starbucks has used their strong cash flow from operations, revolving credit facilities, stock option exercises and debt as their primary source of liquidity. Starbucks primary uses of cash are investing in equipment and facilities to continue to support growth, as well research into new technologies for products. Starbucks other uses of liquidity include share repurchases and paying dividends to shareholders. Compared to its peers, the company’s balance sheet is in a strong position moving forward to meet all necessary obligations. The following table outlines Starbucks long-term debt maturity schedule. As we can see, Starbucks has some debt maturities in the next 5 years. For the debt that the company does have maturing, we have forecasted cash flows each year that that into account this debt maturity schedule. Starbucks is easily able to service this debt each year while having strong cash balances on hand for other capital needs. Starbucks debt rating is BBB+.

Source: Company 10K We have forecasted Starbucks cash balance to continue to increase over the forecast period and believe that Starbucks is fully capable of reducing their debt percentage in the company’s capital

0%10%20%30%40%

Up to $1 $1-2 $2-3 $3-5 $5+

Price Willing to Pay for Small (4oz.) Coffee by Age

18-29 30-59 60+

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structure if the company wanted. Currently, Starbucks has 17% of the capital structure in debt which is lower than notable peers. We have forecasted debt as percentage a percentage of the capital structure to stay consistent throughout our model.

COMPETITORS The following section will analyze the three major players within the industry which include Starbucks, Dunkin Brands and McDonalds. Starbucks (SBUX) Starbucks is the industry leader. They currently have the largest portion of market share at 30.5 percent. Starbucks was founded in 1985 and roasts, markets and retails coffee and specialty coffee. The company has a global presence, operating in over 78 countries and over 31,000 locations. The company sells coffee, tea, other beverages and food items through its company-operated stores as well as alternative channels like licensed stores, convenient stores and grocery stores. In order to control quality, Starbucks is involved in several stages of their coffee production including purchasing, roasting, packaging and distributing to its locations. Starbucks has also begun offering free WIFI access and wireless charging locations for its customers in its stores. This has helped Starbucks increase store traffic as well as the number of potential purchases by offering these upscale amenities for a coffee shop.

Source: FactSet Compared to competitors, Starbucks has a very equal distribution of store locations both domestically and internationally. As the retail coffee market in the U.S. is very mature compared to emerging markets, we believe that Starbucks may begin to cannibalize their sales with new domestic store openings, and thus why we believe the international store count will continue to increase as Starbucks makes a large push into Asia. Dunkin Brand (DNKN)

Dunkin is Starbucks largest competitor in the market. Dunkin currently has 11.5 percent of market share within the industry, which is second behind Starbucks. Dunkin Donuts was founded in 1950 and operates as a subsidiary of Dunkin Brands. The company retails coffee and baked goods and has a presence in over 60 countries and distributes to around 21,000 points worldwide. Industry-relevant revenue was derived from both franchisee-owned and company-owned coffee sales. However, in 2017, the company transitioned to be a 100 percent franchised business model.

Source: FactSet As we can see above, Dunkin has less prevalence in the number of total stores compared to Starbucks. Specifically, Dunkin has a much smaller count of stores in international locations compared to Starbucks. This could represent a possible growth strategy for the company to better compete with Starbucks on a global scale. Dunkin competes within the retail coffee industry much differently from Starbucks. Starbucks markets itself as a higher end coffee brand that appeals to customers who are willing to pay a premium for quality coffee. Dunkin on the other hand, competes on the other side of the spectrum. Specifically, Dunkin markets itself as a low price for quality coffee shop. McDonalds (MCD)

McDonalds is a very different type of player in the retail coffee market than Starbucks. McDonalds recently transitioned to their McCafe business model as the company begins to target more of the coffee market. However, Starbucks is not necessary known for their coffee products. Thus, McDonalds is targeting consumer much like Dunkin is by catering to the modest quality at a lower price point. When comparing Starbucks to other major players in the retail coffee market, it is important to realize that coffee is not the main focus of McDonalds. Rather so, the company has made a push to enter into the market and due to its global brand name, poses threat to

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current market players. As shown below, McDonalds currently has over 38,000 store locations worldwide.

Source: FactSet Compared to Starbucks and Dunkin, McDonalds has a much greater international presence in store location with nearly 25,000. As we can see from the tables, the three main players in the industry all have a relatively similar number of domestic store locations within the 11,000 to 15,000 store range. However, the biggest difference among retail coffee industry players comes from the international exposure that each company has. Overall, among the major players Starbucks is the clear leader in the industry with Dunking being the closest competitor. Both companies operate in similar way and have relatively similar product offerings, however, Dunkin markets itself from its lower price in which they attract customers through a value approach rather than that of specialty. However, Dunking has struggled with the bottom-line growth, especially compared with Starbucks in the recent five years. Dunkin’s domestic store locations have not experienced more than 2% same store sales growth since 2015 while Starbucks has increase substantially more. Margin Comparisons Starbucks has significantly lower margin than its peers across the board. As seen below, Starbucks has a gross margin of 21.9% compared to Dunkin and McDonald’s who both have gross margins around 50%.

Source: FactSet However, after analysis we were not surprised to see this in Starbucks operating margins. Starbucks has a significantly lower percent of licensed stores compared to its peers. This explains the margin

differences because a company with more licensed stores has higher margins, but lower total revenue.

Source: FactSet As seen in the chart above, Starbucks has only 48% of licensed stores. Dunkin on the other hand operates on a 100% licensed store business model. McDonalds also has a very high percentage of Licensed stores at 94%.

INDUSTRY OVERVIEW Coffee is one of the most popular beverages in the world, with more than 400 billion cups consumed each year. In 2019, 57 percent of American adults reported that they drank coffee on a daily basis. This number has continued to rise in the past five years largely driven by an increase in per capita coffee consumption. During this time period, per capita coffee consumption has risen at an annualized rate of 1.1% since 2014. With an increase in total coffee consumption as well as a market shift of consumers towards higher-end and higher-margin coffee options, the industries revenues have expanded with major higher-end companies like Starbucks, exceeding industry averages. Retailers in the industry have started to push towards adding high-quality Arabic based coffee beans and single-origin options, which have allowed retailers to markup their prices to their customers. Although the retailers have struggled with slower demand in plain coffee options, strong demand in cold brew and nitro coffee beverages have helped offset this and increase overall coffee demand. Having higher demand for these more personal and specialized coffee options have substantially benefited retailers being able to raise their price point in contrast to regular coffee. Consumers have also started to shift towards more instant coffee options such as K-Cups. Coffee sales from grocery and marketplace retailers have grown in recent years due to the increased demand for these packaged coffee sachets. This consumer shift is

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largely due to customers wanting coffee fast and not having to wait. This alternative revenue stream is evidenced by both the increased demand of instant coffee cups as well as Starbucks ready-brew coffee. Global Expansion The America’s market has become increasingly saturated with many players and coffee shops everywhere. Due to this, we believe that growth is near its peak growth and companies will have to begin focusing on same store sales growth, as opposed to new store opening. Starbucks has specifically targeted the Asia region as its future growth strategy. As of 2019, Starbucks has 6,777 international stores, of which 86% was company operated. We have projected that Starbucks will have 8,600 international stores by 2024, of which 81% are company operated. Industry Revenue Over the past few year, total coffee consumption in the US has remained relatively flat 3.

Source: IBISWorld However, this trend has continued while more Americans are regularly drinking specialty, gourmet coffee instead of regular coffee. As the industry begins to trend towards more and more specialized coffee, we believe that the industry will continue its push towards more personalized, customer

specific options and continue benefiting the high-end retail coffee players like Starbucks Corporation who offer these specialty coffees. We believe this era represents a new emerging coffee beverage segment in personalization that industry players will need to capitalize on if they want to continue taking market share. Where Coffee is Prepared In order to carefully analyze the coffee industry, it is important to understand where the majority of consumers are having and making their coffee. Recent trends have shown that consumers have begun to consume more coffee away from their homes and purchasing it at retail coffee shops and stores. In 2012, 84 percent of people said they drank coffee the day before prepared at their home 3. The number decreased to 78 percent in 2019 3. We believe this trend will continue as consumers continue wanting the easy of having coffee prepared for them at coffee shops. We also believe this growth will be driven by consumer wanting the specialty coffee that is much harder for them to prepare for themselves.

INDUSTRY TRENDS The two main drivers of growth for coffee shops come from the shift towards specialty coffee beans and blends and also the growing demand of espresso drinks, cold brews and nitro coffees 2. Coffee shops have been able to develop strong customer loyalty by providing a plethora of different specialty coffee products to their customers. Such specialty beans sourced specifically from global based coffee bean plantations are purchased at a higher price and thus retailers are able to purchase a premium for specialty coffees 2. This consumer shift has grown the industries revenue and increased margins. Specialty coffee drinks have risen significantly in the last few years with greater than 35 percent of people drinking more specialty coffee when compared to 2016 3. On the opposite side of the spectrum, regular coffee has made up a shrinking portion of overall industry revenue. Specifically, specialized coffee like single-origin, premium cold brews, nitro coffees and

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Arabica blends have all increased significantly while regular coffee has begun to fall off the tracks 2. Retail Distribution Trends The retail distribution segment of the industry has also benefited from the increase in popularity in instant coffee, which have become increasingly more specialized and gourmet 2. Starbucks has demonstrated this new trend popularity through their instant-brew coffee, which, in past years, has been a low-cost option for consumers, is becoming increasingly more high quality and offered in numerous different flavors and blends to attract customers 1. Overall, this exemplifies the trend of time-strapped individuals’ preference to consume more specialty coffee in numerous flavors, over regular drip coffee. This trend has allowed coffee retailers, like Starbucks, to develop a market niche by selling coffee in various flavors, blends and varieties. By doing so Starbucks is able to increase their market share within not only the coffee industry but also the beverage industry and charge the high premiums for their products while not losing out on customer demand.

MARKETS AND COMPETITION Threat of New Entrants The barriers to enter the retail coffee industry are relatively low and thus the threat of new entrants is moderate. Although coffee retailers need to have the necessary facilities, equipment, furniture and employees, retailers are able to lease this equipment and lower their initial costs and outflows in order to be operational 2. With moderate concentration and saturation within, the top three players having less than 45% of industry revenue, potential entrants have a relatively easy opportunity to enter a local market and cater to a specific niche in the industry 2. However, it is very difficult for new entrants to grow their brand large enough to be truly global brands like Starbucks. On top of this, the possibility of being successful even at a local level remains low to moderate as retailers have a tough time competing against major players. Only a selected number of firms have been able to

successfully grow their retail coffee brands large scale like Starbucks and Dunkin. Another threat of new entrants in the retail coffee industry comes from franchisees which allow operators to open new stores and secure resources like equipment, training and computer systems through the franchise 2. Expanding franchise brands will continue to put pressure on other players in the industry as firms compete for market share. Threat of Substitutes The number of substitute products is high. The coffee industry does have a threat from external operators and products with the main ones including energy drinks, tea, and other beverage substitutes like soda. Additionally, the coffee industry is susceptible to changes in health and wellness surrounding the effects of caffeine and caffeinated beverages. Thus, the industry is subject to changes in consumer attitudes surrounding caffeine and could pose a threat to the coffee and caffeine market 2. On the other hand, the coffee industry's major external threat comes from the growth in the energy drink industry. Major companies like Red Bull and Monster pose great risks as both beverages are highly marketed through their caffeine levels and effects which attract consumers. Specifically, energy drinks offer higher contents of caffeine which has drawn in customers away from their regular coffee drinks. Bargaining Power of Buyers The bargaining power of customers in the retail coffee industry is moderately low. Due to the small size of individual purchases, single buyers do not hold influence on prices. However, in an industry so highly competitive, industry players must be price sensitive in relation to their competition as there are multiple other retailers’ consumers can switch and purchase from. However, customers in the coffee industry have shifted to be more quality sensitive and thus willing to pay higher prices for premium coffee products 2. Overall, price levels are set by consumer demand and competition within the industry. Due to this, customer loyalty is extremely important in the industry. Retailers like Starbucks are best positioned because of the leading customer loyalty program.

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Bargaining Power of Suppliers The power of suppliers in the retail coffee industry are relatively low. However, with the extensive growth in the specialty coffee industry, supplier bargaining power has changed in numerous ways. Currently, farmers or coffee beans who sell to Starbucks and other premium coffee chains are united by an initiative known as fair trade certified coffee. This initiative was designed to ensure that the coffee farmers would be compensated fairly for their crops. Their increase in unity of coffee suppliers under the initiative has worked as a positive externality for suppliers by increasing their ability to exert bargaining power over their buyers. However, this has not affected Starbucks cost structure due to the long-term contracts Starbucks has with their suppliers. Overall, suppliers have relatively low bargaining power due to the abundance of suppliers worldwide to choose from. However, as the industry trends to more specialized quality coffee, suppliers have a little more power in their prices. Rivalry Among Existing Competition Concentration of companies within the retail coffee market is medium. The market is highly fragmented with numerous different coffee shops, restaurants, grocery stores, supermarkets and gas stations that offer different types of retail coffee products. In 2019, 45 percent of the annual industry revenue is concentrated within the top three coffee retailers 2. However, outside of the top three industry players, there are nearly 500,000 different industry establishments throughout the United States that offer coffee products 2. This has enabled many smaller, independent coffee retailers to operate in a niche market by attracting customers through the basis of convenience and being local. Also, the retail coffee industry has an abundance of different kinds of coffee products including freshly brewed, ready to drink, instant coffee and single-cup coffee and coffee beans and grounds which all pose competition among each other on which specific products experience the highest demand and margins.

INDUSTRY ECONOMIC DRIVERS The key economic drivers that fuel coffee spending stem from per capita coffee consumption, demand from supermarkets and grocery stores, the price of coffee and per capita disposable income. Per Capita Coffee Consumption The industry has seen steady growth in per capita coffee consumption over the past decade 2. However, growth in per capita coffee consumption has been slightly constrained over the past five years due to consumers favoring more gourmet specialty coffee. As consumers have moved towards this specialty coffee which sells at higher prices, consumers purchase smaller amounts due to the higher price points 9. This has slowed the overall coffee consumption the past five years as seen in per capita coffee consumption 8. However, this shift in consumer preference has benefited the industry from more consumers purchasing the higher margin coffee. We predict this trend of increasing per capita coffee consumption to continue in the future which represents an opportunity for the industry as consumers continue to shift towards coffee as their caffeinated beverage of choice. World Price of Coffee Beans As a key commodity in the retail coffee industry, coffee bean prices are very important in determining industry operators’ operational costs and profitability. As the price of coffee beans rises, retailers are typically forced to increase their prices as well 2. However, due to an abundance of competition in the industry, this can severely hurt retailers’ overall sales. Typically, coffee bean prices have shown price volatility die to fluctuations in harvesting from global coffee plantations 9. Market expectations believe that coffee prices will rise slightly in the future which will hurt retailers’ margins if they are not able to raise their own prices to consumers 2.

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Per Capita Disposable Income Due to coffee being a consumption good for humans, per capita disposable income is a key component in determining coffee demand. As per capita disposable income rises, consumers switch to higher quality coffee options13. Per capita disposable income has risen slightly over the past five years in the same time period we have seen consumers switch to these higher quality options. We see this positive trend continuing in the future with expectations of increases in per capita disposable income in the next few years.

ECONOMIC ANALYSIS Real Gross Domestic Product (GDP) Positive economic growth will continue to drive consumer spending in the global economy as well as the consumer sector. Real GDP is the most important indicator of the U.S. economy by providing a holistic view of the health of the economy, taking into account inflation and deflation. Personal consumption expenditures account for 68% of the share of GDP10. As a retail company, Starbucks revenue is largely driven by consumer spending and positive economic growth. The US economy grew by 2.3% in 2019 which was driven by consumer consumption and business investment. With current scares due to Corona virus, we expect slower global growth in the coming years, we expect growth rates to hover around the 2% in the coming years. We estimate growth to stay steady around this level for the next four years, before increasing slightly to the most recent five-year GDP average of 2.3% in the long run. Consumer Confidence The Consumer Confidence Index (CCI) is a predictive indicator of consumer spending and also measures the optimism of citizens in the United States. As mentioned, having a strong consumer is imperative for a company like Starbucks making consumer confidence a key economic indicator to examine. Recently, consumer confidence numbers have reached historically high levels despite the recent volatility in

the market. Consumer Confidence was reported at 130.7 in February up from 130.4 in January of 20209. We expect consumer confidence to decrease in the next 6 months as well as the next two years. In the next two years, we expect to see CCI steadily decline to down around 110.0 as consumers become more pessimistic regarding slowing global growth and an inverted yield curve. Unemployment Rate The Unemployment Rate is another overall indicator of the health of the economy. Though, it is more of a lagging indicator than a leading one. Low unemployment tends to lead to increased disposable income and a positive effect on consumer spending and confidence. Low levels of unemployment and increased disposable income are reflected in the high consumer confidence levels currently seen in the US economy. 2019 was a strong year for job growth which saw the unemployment rate drop to 3.6%14. The unemployment rate has showed steady declines over the last six years. These low levels of unemployment can be directly correlated with the strong consumer confidence we have seen. Specifically, low unemployment levels lead to increased consumer spending. We see this as a positive growth outlook for Starbucks and something that has been driving their growth in recent years. We believe that the rate is beginning to level out as it continues to approach extremely low levels. In the coming six months, we expect unemployment levels to increase slightly. In the next two to three years, we expect unemployment rates to increase slightly and hover around 4%, which is the estimated natural rate of unemployment for the United States15.

VALUATION

Revenue Americas

The Americas is by far the largest market by revenue, especially on a per store basis and we expect this to

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continue in our forecast period. On a company operated store basis, we expect revenues to increase from $1.63 to $1.9 in 2024. On a licensed store basis, we expect revenues to increase from $0.24 in 2019 to $0.29 in 2024. We believe that Starbucks will start to put significant focus on same store sales growth as opposed to increasing store count in this region. International

The international segment is by far Starbucks fastest growing region. International revenues have seen strong growth as the company begins focusing on expanding store in the region. On a per store basis, we have company operated average revenue per store increasing from $0.90 in 2019 to $1.07 in 2024. Growth on a per store basis will be slower in this region as the company focuses on increasing store count, as opposed to same store sales growth. Cost of Goods Sold We forecasted COGS as a percentage of sales. Using the most recent five-year historical period we calculated the average COGS as a percentage of sales to be 36%. In our forecast period, we slightly decreased COGS as a percentage of sales by 0.2% each year. We believe Starbucks will be able to do this by reducing the number of plastic cups customers use as the company pushes to be greener. Capital Expenditures Given guidance from management, Capital expenditures are forecasted to be $1.8 billion in 2020. In the following years we have forecasted capital expenditures to grow at the same rate that we forecast the company’s stores to grow at. This is also slightly below the historical average of 6% store growth over the past five years as we do not believe the company will be able to continue opening new stores at that rate. We have forecasted capital expenditure and store growth to be around 4% in 2020 and very slightly decrease each year after.

Other Operating Assumptions While analyzing the historical data we noticed some unusual accounts on Starbucks financial statements. In particular, the account Deferred Revenue has nearly a $7 billion-dollar addition in 2018. However, after digging into the financials, we realize that this account came from the deal that Starbucks made to Nestle to have the rights to sell Starbucks Consumer Packaged Goods (CPG) products. We have projected this account by amortizing the initial amount over the life of the contract. Another unusual account is the $1.3 billion-dollar addition in Income Taxes Payable in 2019. After analysis, we believe that this short-term Income Taxes Payable came from the change in tax laws in 2018. In the past, Starbucks never had any Income Taxes Payable. For this reason, we decided to project Income Taxes Payable to be zero each year in our forecast period. In 2018 and 2019. Starbucks made a large push for growth. They made significant investment in new store locations both domestically and internationally. Thus, some margins were squeezed with higher costs and thus why some of the 2019 numbers are outliers in historical trends. Going forward, we do not believe that Starbucks has significant room for growth in Americas and will begin focusing on improving margins in this region specifically. We have modelled these assumptions into our valuation. Methods of Valuation We arrived at our target stock price range by considering the different economic, strategic, and financial factors that drive the equity value in our forecasts. We also analyzed trends in the retail coffee industry that would affect the forecasted financials. We used four different valuation methodologies including discounted cash flow, economic profit, dividend discount model, and relative valuation. DCF For our DCF we analyzed each of Starbucks operating Segments as discussed earlier to determine our growth forecasts. We believe the discounted cash flow model

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most accurately captures Starbucks intrinsic value due to the fact that we were able to construct varying operating scenarios and capture range of different variables that affect Starbucks share price. While we believe the DCF is the best representation of the target price, lower outputs from our relative valuation models led us to lower our target price range. Our discounted cash flow and economic profit analysis calculated our target price of $96.85 using the various assumptions discussed earlier. The assumptions used reflected our overall opinions on the economy, industry, and Starbucks itself. By forecasting performance for each of the Starbucks business segments, we believe we have captured the most accurate value with the discounted cash flow analysis. Weighted Average Cost of Capital We calculated a WACC of 5.48%, which we kept constant through the forecast period. We have also assumed that the company keeps a consistent capital structure as they already have a lower percentage of total debt at 17.2% in their capital structure. Starbucks has also kept this relatively consistent in the past. Cost of Debt We calculated an after-tax cost of debt of 2%. We used a pre-tax cost of debt of 2.7% which was the YTM on a current 10-year Starbucks bond. We used a marginal tax rate of 26%. The current risk-free rate on a 10-year US Treasury is 1.62%. This implied a default premium of 1.08% on Starbucks debt. Cost of Equity We calculated a cost of equity of 6.2% using the CAPM equation. We used an Equity Risk Premium of 5.15% which was the consensus Henry Fund estimate. We calculated this using an average of the historical, 1, 2 and 5-year weekly beta of .89 and a risk-free rate of 1.62%. Relative Valuation Using relative multiples valuation, we pulled comparable peer to use for our relative valuation. The

companies that we used were Dunkin, McDonalds, Monster Energy, and Coca Cola. We used these peers because all of them have relatively similar future growth expectations and all sell coffee products. We removed other outliers such as Luckin Coffee from our peer comparisons. We arrived at a target price of 85.09 using the one-year forward PEG ratio. We believe that Starbucks trades at a premium compared to their peers for a couple of reasons including; the company is the leader in the market in terms of market revenue share, the company has the strongest brand loyalty programs amongst its peers, the company has a higher future expected growth rate. For these reasons, we did not put as much emphasis on the relative valuation when determining a target price.

CATALYSTS FOR GROWTH

Going forward we see a large importance for Starbucks to continue innovating new products. With consumer trends changing often, companies must be able to clearly identify what types of coffee products consumers will be demanding in the future8. With the increased push towards more personalized coffee beverages, we believe it is imperative that coffee distributors begin offering the personalization that customers want if they want to continue growing sales. The days of plain old regular coffee seem to be behind us. We believe that Starbucks has a large catalyst for growth through their brand loyalty rewards program. With a large emphasis on same store sales growth in the industry, repeat customers are key to being successful in the industry. Companies like Starbucks that offer rewards programs are able to capture more customer loyalty and increase the incentive for customers to visit their stores and make purchases. We believe that Starbucks rewards programs will continue to be a major aspect to capturing more sales in the future. As the retail coffee market in the United States is in a very mature stage and highly concentrated, we believe the largest opportunity for growth is in Asian and emerging markets1. We suspect this will continue to

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be a key growth area in the future for Starbucks to continue expanding.

INVESTMENT POSITIVES

• Starbucks has significant opportunity for growth in the international market

• Growth in per capita coffee consumption continues to increase6

• Annual coffee revenue has been increasing steadily for over the past decade

• Consumer have started to shift towards higher-end specialty coffee beverages which have increased margins and put Starbucks in the front seat to take market share from competitors7

INVESTMENT NEGATIVES

• In the event of an economic downturn, consumers may switch to lower quality, cheaper coffee options which will reduce margins for Starbucks

• A rise in instant coffee cups, such as Keurig, have dented demand for coffee shops and harmed profitability through lower margins

• Worries of Coronavirus could cause more Starbucks stores to close and reduce consumers spending

KEYS TO MONITOR

We believe one of the key factors to monitor is the economic environment and changing consumer demands. Due to the fact that the retail coffee industry has largely benefited the last five years due to the increased demand of higher priced specialty coffee5, we believe it is imperative that consumer confidence remains strong in order to the industry to continue to outperform. If there was a sudden shift in economic sentiment, we believe that the retail coffee industry, and specifically higher end coffee retailers like Starbucks, may be in danger as consumer will shift away from higher priced coffee and shift towards cheaper coffee options such as brewing their own coffee, or purchasing their coffee for cheaper coffee shops.

It is also imperative to monitor Starbucks growth in the International markets. Starbucks has begun putting an emphasis on expanding globally and this posed many more economic and regulatory concerns. The outbreak of the Corona Virus is a perfect example of this which cause Starbucks to temporarily close stores in China. Finally, we will want to carefully monitor Starbucks operating margins. We have forecasted margins to increase over our five-year period. If Starbucks is not able to improve their margins it might change our recommendation.

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REFERENCES

1. Starbucks 2019 10-K 2. IBIS World 3. FactSet 4. https://dailycoffeenews.com/2019/03/11/2019-

coffee-and-beverage-trends-inside-the-ncas-annual-report/

5. Statistica – Retail Coffee Report 6. https://www.escoffieronline.com/coffee-is-the-

most-popular-way-adolescents-consume-caffeine/ 7. Mergent Online 8. https://www.singleplatform.com/blog/restaurant-

industry/trends/coffee-industry-changing-how-will-your-business-adapt/

9. https://dailycoffeenews.com/2019/03/11/2019-coffee-and-beverage-trends-inside-the-ncas-annual-report/

10. Statistica – Retail Coffee Report 11. http://www.ncausa.org/Industry-

Resources/Coffee-and-Cannabis 12. https://www.escoffieronline.com/coffee-is-the-

most-popular-way-adolescents-consume-caffeine/ 13. Mergent Online 14. https://www.singleplatform.com/blog/restaurant

-industry/trends/coffee-industry-changing-how-will-your-business-adapt/

15. https://globaledge.msu.edu/blog/post/55607/the-global-coffee-industry

16. https://www.cnbc.com/2020/01/28/starbucks-sbux-earnings-q1-2020.html

17.

IMPORTANT DISCLAIMER

Henry Fund reports are created by graduate students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.

Starbucks CorporationRevenue Decomposition

Fiscal Years Ending Sept. 30 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Total Company Operated Store Revenue 17,650.70 19,690.30 21,544.40 23,698.84 25,357.76 26,625.65 27,823.80 28,519.40

Growth 4.34% 11.56% 9.42% 10.00% 7.00% 5.00% 4.50% 2.50%

Total Licensed Store Revenue 2,355.00 2,652.20 2,875.00 3,220.00 3,509.80 3,790.58 4,018.02 4,138.56

Growth 9.32% 12.62% 8.40% 12.00% 9.00% 8.00% 6.00% 3.00%

Total Other Revenues 2381.1 2377 2089.2 2,110.09 2,120.64 2,128.06 2,121.68 2,123.80

Growth 2.74% -0.17% -12.11% 1.00% 0.50% 0.35% -0.30% 0.10%

Total Revenues 22,386.80 24,719.50 26,508.60 29,028.93 30,988.20 32,544.30 33,963.50 34,781.76

Growth 4.67% 10.42% 7.24% 9.51% 6.75% 5.02% 4.36% 2.41%

AmericasNet Revenues:

Company-operated stores revenue 13,996.40 14,921.50 16,288.20 17,774.13 18,891.53 19,702.98 20,450.49 20,819.16

# of stores 9,415 9,690 9,974 10,164 10,357 10,553 10,754 10,958

Avg revenue per store 1.49 1.54 1.63 1.75 1.82 1.87 1.90 1.90

Licensed stores revenue 1,617.30 1,814.00 1,958.00 2,254.00 2,439.31 2,615.50 2,752.34 2,814.22

# of stores 7,146 7,770 8,093 8,417 8,753 9,104 9,377 9,564

Avg revenue per store 0.23 0.23 0.24 0.27 0.28 0.29 0.29 0.29

Other 6.30 13.10 12.80 14.22 15.21 15.98 16.69 17.11

Americas Revenue 15,620.00 16,748.60 18,259.00 20,042.35 21,346.06 22,334.46 23,219.53 23,650.49 Growth 5.57% 7.23% 9.02% 9.77% 6.50% 4.63% 3.96% 1.86%

InternationalNet Revenues:

Company-operated stores revenue 3,457.00 4,702.10 5,256.20 5,687.72 6,212.65 6,656.41 7,095.07 7,415.04

# of stores 3,572 5,651 5,860 6,094 6,338 6,592 6,789 6,925

Avg revenue per store 0.97 0.83 0.90 0.93 0.98 1.01 1.05 1.07

Licensed stores revenue 735.10 837.00 917.00 1,110.35 1,328.34 1,483.55 1,602.78 1,684.41

# of stores 6,881 6,201 7,329 7,695 8,080 8,403 8,740 9,089

Avg revenue per store 0.11 0.13 0.13 0.14 0.16 0.18 0.18 0.19

Other 6.80 12.10 17.50 18.96 20.29 21.30 22.26 22.82

International Revenue 4,198.90 5,551.20 6,190.70 6,817.03 7,561.28 8,161.26 8,720.10 9,122.27 Growth 3.33% 32.21% 11.52% 10.12% 10.92% 7.94% 6.85% 4.61%

Corporate & OtherCorporate & Other Revenue 2,567.90 2,419.70 2,089.20 2,110.09 2,120.64 2,128.06 2,121.68 2,123.80

Growth 1.55% -5.77% -13.66% 1.00% 0.50% 0.35% -0.30% 0.10%

Starbucks CorporationIncome Statement

Fiscal Years Ending Sept. 30 2017 2018 2019 2020E 2021E 2022E 2023E 2024ERevenues:Compay-operated stores revenue 17,650.7 19,690.3 21,544.4 23,698.84 25,357.76 26,625.65 27,823.80 28,519.40 Licensed store revenue 2,355.0 2,652.2 2,875.0 3,220.00 3,509.80 3,790.58 4,018.02 4,138.56 Other 2,381.1 2,377.0 2,089.2 2,110.09 2,120.64 2,128.06 2,121.68 2,123.80 Total Revenue Net 22,386.8 24,719.5 26,508.6 29,028.93 30,988.20 32,544.30 33,963.50 34,781.76 Cost of sales including occupancy costs 9,038.2 10,174.5 8,526.9 10,450.42 11,155.75 11,715.95 12,226.86 12,347.52 Store operating expenses 6,493.3 7,193.2 10,493.6 10,334.30 10,535.99 10,414.17 10,189.05 10,086.71 Other operating Expenses 553.8 539.3 371.0 658.96 697.23 715.97 747.20 765.20 Depreciations & amortization expenses 1,011.4 1,247.0 1,377.3 1,306.3 1,456.4 1,529.6 1,562.3 1,600.0 General & administrative expenses 1,393.3 1,759.0 1,824.1 1,799.8 2,014.2 2,115.4 2,207.6 2,260.8 Restructuring & impairments 153.5 224.4 135.8 - - - - - Total operating expenses 18,643.5 21,137.4 22,728.7 24,549.77 25,859.65 26,491.06 26,933.06 27,060.21 Income from equity investees 391.4 301.2 298.0 400.60 427.64 449.11 468.70 479.99 Operating income (loss) 4,134.7 3,883.3 4,077.9 4,879.76 5,556.18 6,502.35 7,499.14 8,201.54 Gain resulting from acquisition of joint venture - 1,376.4 - - - - - - Net gain resulting from divesture of certain operations - 499.2 622.8 - - - - - Loss on extinguishment of debt - - - - - - - - Interest income & other income, net 275.3 191.4 96.5 101.19 104.23 107.36 110.58 113.89 Interest expense 92.5 170.3 331.0 276.00 323.69 373.11 362.53 384.96 Earnings (loss) before income tax 4,317.5 5,780.0 4,466.2 4,704.96 5,336.72 6,236.59 7,247.19 7,930.47 Income tax expense (benefit) 1,432.6 1,262.0 871.6 1,223.29 1,387.55 1,621.51 1,884.27 2,061.92 Net earnings (loss) including noncontrolling interest 2,884.9 4,518.0 3,594.6 3,481.67 3,949.18 4,615.08 5,362.92 5,868.55 Net earnings (loss) attributable to noncontrolling interests (0.2) 0.3 (4.6) (1.67) (1.89) (2.21) (2.57) (2.81) Net earnings attributable to Starbucks Corporation 2,884.7 2,518.3 3,599.2 3,480.00 3,947.28 4,612.87 5,360.35 5,865.74 Weighted average shares outstanding - basic 1,449.5 1,382.7 1,221.2 1,243.94 1,241.61 1,239.35 1,237.15 1,235.01 Net earnings (loss) per share - basic 1.99 3.27 2.95 2.80 3.18 3.72 4.33 4.75 Cash dividends per share 1.05 1.32 1.49 1.64 1.80 1.98 2.18 2.40

Starbucks CorporationBalance Sheet

Fiscal Years Ending Sept. 30 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024ECurrent AssestsCash & Cash Equivilants 1,530.1 2,128.8 2,462.3 8,756.3 2,686.6 972.2 2,452.5 2,171.5 3,611.0 5,306.9 Short-term investments 81.3 134.4 228.6 181.5 70.5 71.64 72.80 73.98 75.18 76.40 Accounts Recievable, net 719.0 768.8 870.4 693.1 879.2 1,007.30 1,075.29 1,129.29 1,178.53 1,206.93 Inventories 1,306.4 1,378.5 1,364.0 1,400.5 1,529.4 1,788.18 1,908.87 2,004.73 2,092.15 2,142.56 Prepaid expenses & other current assets 334.2 350.0 358.1 1,462.8 488.2 551.55 588.78 618.34 645.31 660.85 Total current assets 3,971.0 4,760.5 5,283.4 12,494.2 5,653.9 4,390.9 6,098.2 5,997.8 7,602.1 9,393.7 Long-term investments 312.5 1,141.7 542.3 267.7 220.0 233.6 248.1 263.5 279.9 297.2 Equity & cost investments 352.0 354.5 481.6 334.7 396.0 396.0 396.0 396.0 396.0 396.0 Property, plant & equipment, net 4,088.3 4,533.8 4,919.5 5,929.1 6,431.7 6,925.4 7,337.4 7,747.2 8,197.9 8,687.6 Deferred income taxes, net 1,180.8 885.4 795.4 134.7 1,765.8 1,589.2 1,430.3 1,287.3 1,158.5 1,042.7 Other long-term assets 415.9 417.7 362.8 412.2 479.6 537.0 573.3 602.1 628.3 643.5 Other intangible assets 520.4 516.3 441.4 1,042.2 781.8 742.7 705.6 670.3 636.8 604.9 Goodwill 1,575.4 1,719.6 1,539.2 3,541.6 3,490.8 3,490.8 3,490.8 3,490.8 3,490.8 3,490.8 Total assets 12,416.3 14,329.5 14,365.6 24,156.4 19,219.6 18,305.7 20,279.7 20,454.9 22,390.4 24,556.4 Accounts payable 684.2 730.6 782.5 1,179.3 1,189.7 1,146.6 1,224.0 1,285.5 1,341.6 1,373.9 Accrued liabilities 1,755.3 1,999.1 1,934.5 2,298.4 2,418.3 2,502.3 2,671.2 2,805.3 2,927.7 2,998.2 Insurance reserves 224.8 246.0 215.2 213.7 - - - - - - Stored value card liability 983.8 1,171.2 1,288.5 1,642.9 1,269.0 1,335.3 1,425.5 1,497.0 1,562.3 1,600.0 Income taxes payable - - - - 1,291.7 - - - - - Current portion of long-term debt - 400.0 - 349.9 - - 1,250.0 500.0 1,000.0 1,538.3 Total current liabilities 3,648.1 4,546.9 4,220.7 5,684.2 6,168.7 4,984.3 6,570.7 6,087.9 6,831.5 7,510.3 Long-term debt 2,347.5 3,602.2 3,932.6 9,090.2 11,167.0 11,988.5 12,568.9 12,926.9 13,257.8 13,617.5 Deferred revenue - - - 6,775.7 6,744.4 6,070.0 5,463.0 4,916.7 4,425.0 3,982.5 Other long-term liabilities 600.9 689.7 755.3 1,430.5 1,370.5 1,451.4 1,549.4 1,627.2 1,698.2 1,739.1 Total liabilities 6,596.5 8,438.8 8,908.6 22,980.6 25,450.6 24,494.2 26,152.0 25,558.7 26,212.5 26,849.4 Common Stock & Additional Paid in Capital 42.6 42.6 42.5 42.4 42.3 42.3 42.3 42.3 42.3 42.3 Retained earnings (accumulated deficit) 5,974.8 5,949.8 5,563.2 1,457.4 (5,771.2) (5,728.6) (5,412.5) (4,643.9) (3,362.3) (1,833.2) Accumulated other comprehensive income (loss) (199.4) (108.4) (155.6) (330.3) (503.3) (503.3) (503.3) (503.3) (503.3) (503.3) Total shareholders' equity 5,818.0 5,884.0 5,450.1 1,169.5 (6,232.2) (6,189.6) (5,873.5) (5,104.9) (3,823.3) (2,294.2) Noncontrolling interests 1.8 6.7 6.9 6.3 1.2 1.2 1.2 1.2 1.2 1.2 Total equity 5,819.8 5,890.7 5,457.0 1,175.8 (6,231.0) (6,188.4) (5,872.3) (5,103.7) (3,822.1) (2,293.0) Total liabilities and Equity 12,416.3 14,329.5 14,365.6 24,156.4 19,219.6 18,305.7 20,279.7 20,454.9 22,390.4 24,556.4

Starbucks CorporationHistorical Cash Flow Statement

Fiscal Years Ending Sept. 30 2015 2016 2017 2018 2019Cash Flow From OperationsNet earnings (loss) including noncontrolling interest 2,759.3 2,818.9 2,884.9 4,518.0 3,594.6 Depreciation & amortization 933.8 1,030.1 1,067.1 1,305.9 1,449.3 Deferred income taxes, net 21.2 265.7 95.1 714.9 (1,495.4)Income earned from equity method investees (190.2) (250.2) (310.2) (242.8) (250.6)Distributions received from equity investees 148.2 223.3 186.6 226.8 216.8 Loss (gain) resulting from acquisition/sale of equity/joint venture (394.3) (6.1) (93.5) (499.2) - Net gain resulting from divestures of certain retail operations - - - (1,376.4) (622.8) Loss on extinguishment of debt 61.1 - - - - Stock based compensation 209.8 218.1 176.0 250.3 308.0 Excess tax benefit on share-based awards (132.4) (122.8) (77.5) - - Goodwill impairment - - 87.2 37.6 10.5 Other adjustments 53.8 45.1 68.9 89.0 187.9 Accounts recievable (82.8) (55.6) (96.8) 131.0 (197.7) Inventories (207.9) (67.5) 14.0 (41.2) (173.0) Accounts payable 137.7 46.9 46.4 391.6 31.9 Income taxes payable, net 87.6 - - - 1,237.1 Accrued liabilities & insurance reserves 124.4 - - - - Deferred revenue 170.3 - - - (30.5) Prepaid expenses, other current assets & other assets 49.5 - - - 922.0 Stored value card liability - 180.4 130.8 7,109.4 - Other operating assets & liabilities - 248.8 (4.7) (677.1) (141.1) Net cash flow from operating activiiy 3,749.1 4,575.1 4,174.3 11,937.8 5,047.0

Cash From from InvestingPurchases of investments (567.4) (1,585.7) (674.4) (191.9) (190.4) Sale of investments 600.6 680.7 1,054.5 459.0 298.3 Maturities & calls of investment 18.8 27.9 149.6 45.3 59.8 Acquisitions, net of cash acquired (284.3) - - (1,311.3) - Additions to PP&E (1,303.7) (1,440.3) (1,519.4) (1,976.4) (1,806.6) Net proceeds from sale of equity in joint ventures & certain retail operations 8.9 69.6 85.4 608.2 684.3 Other Investing activitives 6.8 24.9 54.3 5.6 (56.2) Net cash flow from investing (1,520.3) (2,222.9) (850.0) (2,361.5) (1,010.8)

Cash from financingProceeds from issuance of LT debt 848.5 1,254.5 750.2 5,584.1 1,996.0 Repayments of LT debt (610.1) - (400.0) - (350.0) Cash used for purchases of non-controlling interest (360.8) - - - - Proceeds from issuance of common stock 191.8 160.7 150.8 153.9 409.8 Exess tax benefit from share-based awards 132.4 122.8 77.5 - - Cash dividends paid (928.6) (1,178.0) (1,450.4) (1,743.4) (1,761.3)Repurchase of common stock (1,436.1) (1,995.6) (2,042.5) (7,133.5) (10,222.3)Minimum tax withholdings on share-based awards (75.5) (106.0) (82.8) (62.7) (111.6)Other financing activities (18.1) (8.4) (4.4) (41.2) (17.5)Net cash from financing (2,256.5) (1,750.0) (3,001.6) (3,242.8) (10,056.9)

Effect of exchange rate changes on cash & cash equivilants (150.6) (3.5) 10.8 (39.5) (49.0) Net increase (decrease) in cash & cash equivilants (27.7) 602.2 322.7 6,333.5 (6,020.7) Cash & cash equivilants, beginning of period 1,708.4 1,530.1 2,128.8 2,462.3 8,756.3 Cash & cash equivilants, end of period 1,530.1 2,128.8 2,246.3 8,756.3 2,686.6

Starbucks CorporationCommon Size Income Statement

Fiscal Years Ending Sept. 30 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024ERevenues:Compay-operated stores revenue 79.31% 79.02% 78.84% 79.65% 81.27% 81.64% 81.83% 81.81% 81.92% 82.00%Licensed store revenue 9.72% 10.11% 10.52% 10.73% 10.85% 11.09% 11.33% 11.65% 11.83% 11.90%Other 10.98% 10.87% 10.64% 9.62% 7.88% 7.27% 6.84% 6.54% 6.25% 6.11%Total Revenue Net 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales including occupancy costs 40.64% 39.93% 40.37% 41.16% 32.17% 36.00% 36.00% 36.00% 36.00% 35.50%Store operating expenses 28.24% 28.45% 29.01% 29.10% 39.59% 35.60% 34.00% 32.00% 30.00% 29.00%Other Operating Expenses 2.73% 2.56% 2.47% 2.18% 1.40% 2.27% 2.25% 2.20% 2.20% 2.20%Depreciations & amortization expenses 4.66% 4.60% 4.52% 5.04% 5.20% 4.50% 4.70% 4.70% 4.60% 4.60%General & administrative expenses 6.24% 6.38% 6.22% 7.12% 6.88% 6.20% 6.50% 6.50% 6.50% 6.50%Restructuring & impairments 0.00% 0.00% 0.69% 0.91% 0.51% 0.00% 0.00% 0.00% 0.00% 0.00%Total operating expenses 82.51% 81.92% 83.28% 85.51% 85.74% 84.57% 83.45% 81.40% 79.30% 77.80%Income from equity investees 1.30% 1.49% 1.75% 1.22% 1.12% 1.38% 1.38% 1.38% 1.38% 1.38%Operating income (loss) 18.79% 19.57% 18.47% 15.71% 15.38% 16.81% 17.93% 19.98% 22.08% 23.58%Gain resulting from acquisition of joint venture 2.04% 0.00% 0.00% 5.57% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net gain resulting from divesture of certain operations 0.00% 0.00% 0.00% 2.02% 2.35% 0.00% 0.00% 0.00% 0.00% 0.00%Loss on extinguishment of debt 0.32% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Interest income & other income, net 0.22% 0.51% 1.23% 0.77% 0.36% 0.35% 0.34% 0.33% 0.33% 0.33%Interest expense 0.37% 0.38% 0.41% 0.69% 1.25% 0.95% 1.04% 1.15% 1.07% 1.11%Earnings (loss) before income tax 20.37% 19.70% 19.29% 23.38% 16.85% 16.21% 17.22% 19.16% 21.34% 22.80%Income tax expense (benefit) 5.97% 6.47% 6.40% 5.11% 3.29% 4.21% 4.48% 4.98% 5.55% 5.93%Net earnings (loss) including noncontrolling interest 14.40% 13.22% 12.89% 18.28% 13.56% 11.99% 12.74% 14.18% 15.79% 16.87%Net earnings (loss) attributable to noncontrolling interests -0.01% -0.01% 0.00% 0.00% -0.02% -0.01% -0.01% -0.01% -0.01% -0.01%Net earnings attributable to Starbucks Corporation 14.39% 13.22% 12.89% 10.19% 13.58% 11.99% 12.74% 14.17% 15.78% 16.86%

Starbucks CorporationCommon Size Balance Sheet

Fiscal Years Ending Sept. 30 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024ECurrent AssestsCash & Cash Equivilants 7.98% 9.99% 11.00% 35.42% 10.13% 3.35% 7.91% 6.67% 10.63% 15.26%Short-term investments 0.42% 0.63% 1.02% 0.73% 0.27% 0.25% 0.23% 0.23% 0.22% 0.22%Accounts Recievable, net 3.75% 3.61% 3.89% 2.80% 3.32% 3.47% 3.47% 3.47% 3.47% 3.47%Inventories 6.82% 6.47% 6.09% 5.67% 5.77% 6.16% 6.16% 6.16% 6.16% 6.16%Prepaid expenses & other current assets 1.74% 1.64% 1.60% 5.92% 1.84% 1.90% 1.90% 1.90% 1.90% 1.90%Total current assets 20.72% 22.33% 23.60% 50.54% 21.33% 15.13% 19.68% 18.43% 22.38% 27.01%Long-term investments 1.63% 5.36% 2.42% 1.08% 0.83% 0.80% 0.80% 0.81% 0.82% 0.85%Equity & cost investments 1.84% 1.66% 2.15% 1.35% 1.49% 1.36% 1.28% 1.22% 1.17% 1.14%Property, plant & equipment, net 21.33% 21.27% 21.98% 23.99% 24.26% 23.86% 23.68% 23.81% 24.14% 24.98%Deferred income taxes, net 6.16% 4.15% 3.55% 0.54% 6.66% 5.47% 4.62% 3.96% 3.41% 3.00%Other long-term assets 2.17% 1.96% 1.62% 1.67% 1.81% 1.85% 1.85% 1.85% 1.85% 1.85%Other intangible assets 2.72% 2.42% 1.97% 4.22% 2.95% 2.56% 2.28% 2.06% 1.87% 1.74%Goodwill 8.22% 8.07% 6.88% 14.33% 13.17% 12.03% 11.26% 10.73% 10.28% 10.04%Total assets 64.79% 67.22% 64.17% 97.72% 72.50% 63.06% 65.44% 62.85% 65.92% 70.60%

Accounts payable 3.57% 3.43% 3.50% 4.77% 4.49% 3.95% 3.95% 3.95% 3.95% 3.95%Accrued liabilities 9.16% 9.38% 8.64% 9.30% 9.12% 8.62% 8.62% 8.62% 8.62% 8.62%Insurance reserves 1.17% 1.15% 0.96% 0.86% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Stored value card liability 5.13% 5.49% 5.76% 6.65% 4.79% 4.60% 4.60% 4.60% 4.60% 4.60%Income taxes payable 0.00% 0.00% 0.00% 0.00% 4.87% 0.00% 0.00% 0.00% 0.00% 0.00%Current portion of long-term debt 0.00% 1.88% 0.00% 1.42% 0.00% 0.00% 4.03% 1.54% 2.94% 4.42%Total current liabilities 19.04% 21.33% 18.85% 22.99% 23.27% 17.17% 21.20% 18.71% 20.11% 21.59%Long-term debt 12.25% 16.90% 17.57% 36.77% 42.13% 41.30% 40.56% 39.72% 39.04% 39.15%Deferred revenue 0.00% 0.00% 0.00% 27.41% 25.44% 20.91% 17.63% 15.11% 13.03% 11.45%Other long-term liabilities 3.14% 3.24% 3.37% 5.79% 5.17% 5.00% 5.00% 5.00% 5.00% 5.00%Total liabilities 34.42% 39.59% 39.79% 92.97% 96.01% 84.38% 84.39% 78.54% 77.18% 77.19%Common Stock & Additional Paid in Capital 0.22% 0.20% 0.19% 0.17% 0.16% 0.15% 0.14% 0.13% 0.12% 0.12%Retained earnings (accumulated deficit) 31.18% 27.91% 24.85% 5.90% -21.77% -19.73% -17.47% -14.27% -9.90% -5.27%Accumulated other comprehensive income (loss) -1.04% -0.51% -0.70% -1.34% -1.90% -1.73% -1.62% -1.55% -1.48% -1.45%Total shareholders' equity 30.36% 27.60% 24.35% 4.73% -23.51% -21.32% -18.95% -15.69% -11.26% -6.60%Noncontrolling interests 0.01% 0.03% 0.03% 0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total equity 30.37% 27.64% 24.38% 4.76% -23.51% -21.32% -18.95% -15.68% -11.25% -6.59%Total liabilities and Equity 64.79% 67.22% 64.17% 97.72% 72.50% 63.06% 65.44% 62.85% 65.92% 70.60%

Starbucks CorporationForecasted Cash Flow Statement

Fiscal Years Ending Sept. 30 2020E 2021E 2022E 2023E 2024E

Net Income 3,480.0 3,947.3 4,612.9 5,360.3 5,865.7

Depreciation 1,306.3 1,456.4 1,529.6 1,562.3 1,600.0

Cash Flows from Operating Activities

Short-term investments (1.1) (1.2) (1.2) (1.2) (1.2)

Accounts recievable, net (128.1) (68.0) (54.0) (49.2) (28.4)

Invesntories (258.8) (120.7) (95.9) (87.4) (50.4)

Prepaid expenses & other current assets (63.3) (37.2) (29.6) (27.0) (15.5)

Accounts payable (43.1) 77.4 61.5 56.1 32.3

Accrued liabilities 84.0 168.9 134.1 122.3 70.5

Insurance reserves - - - - -

Store value card liability 66.3 90.1 71.6 65.3 37.6

Income taxes payable (1,291.7) - - - -

Deferred income taxes, net 176.6 158.9 143.0 128.7 115.9

Deferred refenue (674.4) (607.0) (546.3) (491.7) (442.5)

Total Cash Flows from Operating Activities 2,652.6 5,065.0 5,825.8 6,638.6 7,184.0

Cash Flows from Investing ActivitiesLong-term investments (13.6) (14.5) (15.4) (16.3) (17.4)

Equity & cost investments - - - - -

Other intangible assets 39.1 37.1 35.3 33.5 31.8

Other long-term liabilities (57.4) (36.2) (28.8) (26.3) (15.1)

Capital expenditures (1,800.0) (1,868.4) (1,939.4) (2,013.1) (2,089.6)

Total Cash Flows from Investing Activities (1,832.0) (1,882.0) (1,948.3) (2,022.2) (2,090.3)

Cash Flows from Financing ActivitiesCommon Stock & APIC - - - - -

Long-term debt 821.5 580.5 358.0 330.9 359.6

Other long-term liabilities 80.9 98.0 77.8 71.0 40.9

Dividends paid (1,937.4) (2,131.2) (2,344.3) (2,578.7) (2,836.6)

Stock repurchase (1,500.0) (1,500.0) (1,500.0) (1,500.0) (1,500.0)

Current portion of long-term debt - 1,250.0 (750.0) 500.0 538.3

Total Cash Flows from Financing Activities (2,535.0) (1,702.8) (4,158.5) (3,176.9) (3,397.7)

Increase (decrease) in cash & cash equivilants (1,714.4) 1,480.2 (281.0) 1,439.5 1,696.0 Cash & cash equivalants at beginning of year 2,686.6 972.2 2,452.5 2,171.5 3,611.0

Cash & cash equivalants at end of year 972.2 2,452.5 2,171.5 3,611.0 5,306.9

Starbucks CorporationValue Driver Estimation

Fiscal Years Ending Sept. 30 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Revenue 19,162.7 21,315.9 22,386.8 24,719.5 26,508.6 29,028.9 30,988.2 32,544.3 33,963.5 34,781.8

Less: Cost of sales including occupancy costs 7,787.5 8,511.1 9,038.2 10,174.5 8,526.9 10,450.4 11,155.8 11,715.9 12,226.9 12,347.5

Less: Store operating expenses 5,411.1 6,064.3 6,493.3 7,193.2 10,493.6 10,334.3 10,536.0 10,414.2 10,189.1 10,086.7

Less: Other operating expenses 522.4 545.4 553.8 539.3 371.0 659.0 697.2 716.0 747.2 765.2

Less: Depreciation & ammortization 893.9 980.8 1,011.4 1,247.0 1,377.3 1,306.3 1,456.4 1,529.6 1,562.3 1,600.0

Less: SG&A expenses 1,196.7 1,360.6 1,393.3 1,759.0 1,824.1 1,799.8 2,014.2 2,115.4 2,207.6 2,260.8

Plus: Implied interest on operating leases 129.0 137.4 175.0 206.3 224.4 244.3 263.1 278.8 294.3 311.5

EBITA 3,480.1 3,991.1 4,071.8 4,012.8 4,140.1 4,723.4 5,391.7 6,332.0 7,324.8 8,033.0

Tax Adjustment

Income tax expense 1,143.7 1,379.7 1,432.6 1,262.0 871.6 1,223.3 1,387.5 1,621.5 1,884.3 2,061.9

Marginal tax rate 35.7% 33.9% 33.2% 26.5% 23.0% 26.0% 26.0% 26.0% 26.0% 26.0%

Plus: Tax sheild on restructuring & impairments - - 51.0 59.5 31.2 - - - - -

Less: Tax from income from equitee investees 89.2 107.9 129.9 79.8 68.5 104.2 111.2 116.8 121.9 124.8

Less: Tax from gain from acquisition of joint venture 139.4 - - 364.7 - - - - - -

Less: Tax from gain from divesture of certain operations - - - 132.3 143.2 - - - - -

Plus: Tax sheild on loss on extingishment of debt 21.8 - - - - - - - - -

Less: Tax from interest income & other 15.4 36.6 91.4 50.7 22.2 26.3 27.1 27.9 28.7 29.6

Plus: Tax shield on interest expense 25.2 27.6 30.7 45.1 76.1 71.8 84.2 97.0 94.3 100.1

Plus: Tax sheild on lease interest 46.1 46.6 58.1 54.7 51.6 63.5 68.4 72.5 76.5 81.0

Total Adjusted Taxes 992.7 1,309.4 1,351.0 793.7 796.6 1,228.1 1,401.8 1,646.3 1,904.4 2,088.6

Plus: Change in deferred tax - 244.5 (170.6) 619.8 (2,210.3) 1,672.0 (17.7) (15.9) (14.3) (12.9)

NOPLAT: 2,487.4 2,926.3 2,550.2 3,838.9 1,133.2 5,167.3 3,972.2 4,669.8 5,406.0 5,931.6

Invested Capital (IC):Plus: Normal cash (6% of sales) 1,149.8 1,279.0 1,343.2 1,483.2 1,590.5 1,741.7 1,859.3 1,952.7 2,037.8 2,086.9 Plus: Accounts recievable 719.0 768.8 870.4 693.1 879.2 1,007.3 1,075.3 1,129.3 1,178.5 1,206.9 Plus: Inventories 1,306.4 1,378.5 1,364.0 1,400.5 1,529.4 1,788.2 1,908.9 2,004.7 2,092.2 2,142.6 Plus: Prepaid expenses & other current assets 334.2 350.0 358.1 1,462.8 488.2 551.5 588.8 618.3 645.3 660.9 Operating Assets 3,509.4 3,776.3 3,935.7 5,039.6 4,487.3 5,088.8 5,432.2 5,705.0 5,953.8 6,097.2 Less: Accounts payable 684.2 730.6 782.5 1,179.3 1,189.7 1,146.6 1,224.0 1,285.5 1,341.6 1,373.9 Less: Accrued liabilities 1,755.3 1,999.1 1,934.5 2,298.4 2,418.3 2,502.3 2,671.2 2,805.3 2,927.7 2,998.2 Less: Insurance reserves 224.8 246.0 215.2 213.7 - - - - - - Less: Stored value card liability 983.8 1,171.2 1,288.5 1,642.9 1,269.0 1,335.3 1,425.5 1,497.0 1,562.3 1,600.0 Non-Interest Bearing Current Liabilities 3,648.1 4,146.9 4,220.7 5,334.3 4,877.0 4,984.3 5,320.7 5,587.9 5,831.5 5,972.0 Net Operating Working Capital (138.7) (370.6) (285.0) (294.7) (389.7) 104.5 111.6 117.2 122.3 125.2 Plus: Net PP&E 4,088.3 4,533.8 4,919.5 5,929.1 6,431.7 6,925.4 7,337.4 7,747.2 8,197.9 8,687.6 Plus: Intangible assets 520.4 516.3 441.4 1,042.2 781.8 742.7 705.6 670.3 636.8 604.9 Plus: Other operating assets 415.9 417.7 362.8 412.2 479.6 537.0 573.3 602.1 628.3 643.5 Plus: PV of operating leases 5,089.6 6,482.2 7,640.0 8,311.1 9,046.5 9,951.1 10,946.3 12,040.9 13,245.0 14,569.5 Operating Long Term Assets 10,114.2 11,950.0 13,363.7 15,694.6 16,739.6 18,156.3 19,562.5 21,060.4 22,708.0 24,505.4 Less: Deferred revenue - - - 6,775.7 6,744.4 6,070.0 5,463.0 4,916.7 4,425.0 3,982.5 Less: Other operating liabilities 600.9 689.7 755.3 1,430.5 1,370.5 1,451.4 1,549.4 1,627.2 1,698.2 1,739.1 Operating Long Term Non-Interest Bearing Liabilities 600.9 689.7 755.3 8,206.2 8,114.9 7,521.4 7,012.4 6,543.9 6,123.2 5,721.6 Invested Capital 9,374.6 10,889.6 12,323.4 7,193.7 8,235.0 10,739.4 12,661.6 14,633.7 16,707.1 18,909.1

Free Cash Flow (FCF):NOPLAT 2,487.4 2,926.3 2,550.2 3,838.9 1,133.2 5,167.3 3,972.2 4,669.8 5,406.0 5,931.6 Change in IC 1,515.0 1,433.8 (5,129.8) 1,041.3 2,504.4 1,922.3 1,972.0 2,073.4 2,202.0 FCF 1,411.2 1,116.4 8,968.6 91.9 2,662.9 2,049.9 2,697.8 3,332.6 3,729.6

Return on Invested Capital (ROIC):NOPLAT 2,487.4 2,926.3 2,550.2 3,838.9 1,133.2 5,167.3 3,972.2 4,669.8 5,406.0 5,931.6 Beg. IC 9,374.6 10,889.6 12,323.4 7,193.7 8,235.0 10,739.4 12,661.6 14,633.7 16,707.1 ROIC 31.2% 23.4% 31.2% 15.8% 62.7% 37.0% 36.9% 36.9% 35.5%

Economic Profit (EP):Beg. IC 9,374.6 10,889.6 12,323.4 7,193.7 8,235.0 10,739.4 12,661.6 14,633.7 16,707.1

x (ROIC - WACC) 25.7% 17.9% 25.7% 10.3% 57.3% 31.5% 31.4% 31.5% 30.0%

EP 2,412.2 1,953.0 3,163.1 738.7 4,715.7 3,383.3 3,975.5 4,603.6 5,015.4

Starbucks CorporationWeighted Average Cost of Capital (WACC) Estimation

Cost of Equity: ASSUMPTIONS:Risk-Free Rate 1.62% 10-year Treasury bondBeta 0.89 Average of 1, 2, and 5-year weekly betaEquity Risk Premium 5.15% Henry Fund EstimateCost of Equity 6.20%

Cost of Debt:Risk-Free Rate 1.62% 10-year Treasury bondImplied Default Premium 1.08%Pre-Tax Cost of Debt 2.70% YTM on company's 10 year corporate bondMarginal Tax Rate 26.0%After-Tax Cost of Debt 2.00%

Market Value of Common Equity: MV WeightsTotal Shares Outstanding 1221.2Current Stock Price $80.15MV of Equity 97,879.18 82.88%

Market Value of Debt:Short-Term Debt - Current Portion of LTD - Long-Term Debt 11,167.00 PV of Operating Leases 9,046.49 MV of Total Debt 20,213.49 17.12%

Market Value of the Firm 118,092.67 100.00%

Estimated WACC 5.48%

Starbucks Corporation

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth of NOPLAT 2.00% CV Year ROIC 35.50% WACC 5.48% Cost of Equity 6.20%

Fiscal Years Ending Sept. 30 2020E 2021E 2022E 2023E 2024E

DCF Model:

Free Cash Flow (FCF) 2,662.94 2,049.91 2,697.76 3,332.62 3,729.60 Continuing Value (CV) 160,676.53 PV of FCF 2,524.50 1,842.32 2,298.51 2,691.82 129,781.17

Value of Operating Assets: 139,138.33

Non-Operating Adjustments:Short-term investments 70.50 Long-term investments 220.00 Equity & cost investments 396.00 Excess cash 1,096.08 Value of Operating Assets: 1,782.58

Long term debt 11,167.00 ESOP 1,129.95 PV of operating leases 9,046.49 Value of non-operating liabilities 21,343.44

Value of Equity 119,577.47

Shares Outstanding 1,243.94 Intrinsic Value of Last FYE 96.13 Implied Price as of Today 96.85

EP Model:

Economic Profit (EP) 4,715.73 3,383.27 3,975.48 4,603.58 5,015.41 Continuing Value (CV) 143,969.43 PV of EP 4,470.58 3,040.65 3,387.15 3,718.39 116,286.56

Total PV of EP 130,903.32 Invested Capital (last FYE) 8,235.01 Value of Operating Assets: 139,138.33

Non-Operating Adjustments:Short-term investments 70.50 Long-term investments 220.00 Equity & cost investments 396.00 Excess cash 1,096.08 Value of Operating Assets: 1,782.58

Long term debt 11,167.00 ESOP 1,129.95 PV of operating leases 9,046.49 Value of non-operating liabilities 21,343.44

Value of Equity 119,577.47

Shares Outstanding 1,243.94 Intrinsic Value of Last FYE 96.13 Implied Price as of Today 96.85

Starbucks CorporationDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Sept. 30 2020E 2021E 2022E 2023E 2024E

EPS 2.80$ 3.18$ 3.72$ 4.33$ 4.75$

Key Assumptions CV growth of EPS 2.00% CV Year ROE -255.80% Cost of Equity 6.20%

Future Cash Flows P/E Multiple (CV Year) 23.98

EPS (CV Year) 4.75$ Future Stock Price 113.87$ Dividends Per Share 1.64 1.80 1.98 2.18 2.40 Discounted Cash Flows 1.54 1.60 1.66 1.71 89.51

Intrinsic Value as of Last FYE 96.02$

Implied Price as of Today 96.74$

Starbucks CorporationRelative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2020E 2021E P/E 20 P/E 21 EPS gr. PEG 20 PEG 21DNKN Dunkin Brands $68.78 $3.17 $3.22 21.70 21.36 7.2 3.02 2.97

MCD McDonalds $198.51 $8.52 $9.22 23.30 21.53 7.5 3.09 2.86

MNST Monster Energy $63.99 $2.28 $2.53 28.07 25.29 11.1 2.53 2.28

KO Coca Cola $54.76 $2.25 $2.45 24.34 22.35 8.5 2.86 2.62

Average 24.35 22.63 2.87 2.68

SBUX Starbucks Corporation $80.15 2.80 $3.18 28.6 25.2 10.6 2.7 2.4

Implied Relative Value: P/E (EPS20) $ 68.12 P/E (EPS21) 71.96$

PEG (EPS20) 85.09$ PEG (EPS21) 90.26$

* Removed outliers including Luckin

Starbucks CorporationKey Management Ratios

Fiscal Years Ending Sept. 30 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Liquidity Ratios:

Quick Ratio (CA - Cash)/CL 0.67 0.58 0.67 0.66 0.48 0.69 0.55 0.63 0.58 0.54Current Ratio ( CA/CL) 1.09 1.05 1.25 2.20 0.92 0.88 0.93 0.99 1.11 1.25Cash Ratio (Cash/CL) 0.42 0.47 0.58 1.54 0.44 0.20 0.37 0.36 0.53 0.71

Asset-Management Ratios:

Inventory Turnover (Sales/Inventory) 14.67 15.46 16.41 17.65 17.33 16.23 16.23 16.23 16.23 16.23Receivable Turnover ( Sales / AR) 26.65 27.73 25.72 35.67 30.15 28.82 28.82 28.82 28.82 28.82Total Asset Turnover ( Sales/TA) 1.54 1.49 1.56 1.02 1.38 1.59 1.53 1.59 1.52 1.42Net WC Turnover (Sales/NWC)

Financial Leverage Ratios:

Debt to Equity ( TL / TE) 1.13 1.43 1.63 19.54 -4.08 -3.96 -4.45 -5.01 -6.86 -11.71Equity Multiplier ( TA/TE) 2.13 2.43 2.63 20.54 -3.08 -2.96 -3.45 -4.01 -5.86 -10.71Debt to Asset ( TL /TA) 0.53 0.59 0.62 0.95 1.32 1.34 1.29 1.25 1.17 1.09

Profitability Ratios:

Return on Equity (DuPont Analysis) 47.38% 47.83% 52.86% 214.18% -57.76% -56.23% -67.22% -90.38% -140.25% -255.81%Return on Asset (NI/TA) 22.22% 19.67% 20.08% 18.70% 18.70% 19.02% 19.47% 22.56% 23.95% 23.90%Gross Margin ((Sales-COGS)/Sales) 59.36% 60.07% 59.63% 58.84% 67.83% 64.00% 64.00% 64.00% 64.00% 64.50%Operating Margin (EBIT/ Sales) 24.68% 24.04% 23.16% 27.34% 19.65% 19.16% 20.64% 23.54% 26.91% 29.31%

Payout Policy Ratios:Dividend Payout Ratio (Dividend/EPS) 36.96% 44.50% 52.76% 40.37% 50.51% 58.59% 56.71% 53.28% 50.35% 50.52%Total Payout Ratio ((Divs. + Repurchases)/NI) 85.76% 112.63% 121.08% 352.50% 332.95% 98.78% 91.99% 83.34% 76.09% 73.93%

Starbucks CorporationPresent Value of Operating Lease Obligations

Fiscal Years Ending Sept. 30 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Year 1 300.0 310.0 320.0 330.0 340.0 1002.4 1032.4 1125.1 1213.1 1340.6 1432.9Year 2 250.0 260.0 270.0 280.0 290.0 854.7 892.5 1006.2 1141.6 1273.2 1342.2Year 3 225.0 230.0 235.0 240.0 245.0 711.3 739.8 896.4 1068.6 1190.2 1247.4Year 4 175.0 180.0 185.0 190.0 195.0 589.5 624.0 821.3 986.9 1087.3 1124.3Year 5 100.0 104.0 108.0 112.0 116.0 498.8 548.9 740.5 888.1 958.1 996.4Thereafter 290.0 300.0 310.0 320.0 330.0 1656.0 1831.9 2695.5 3315.2 3504.4 4087.7Total Minimum Payments 1340.0 1384.0 1428.0 1472.0 1516.0 5312.7 5669.5 7285.0 8613.5 9353.8 10230.9Less: Cumulative Interest 117.3 121.1 124.9 128.7 132.5 534.3 579.9 802.8 973.5 1042.7 1184.4PV of Minimum Payments 1222.7 1262.9 1303.1 1343.3 1383.5 4778.4 5089.6 6482.2 7640.0 8311.1 9046.5

1.2 1.4 1.6 1.4 1.4Implied Interest in Year 1 Payment 33.0 34.1 35.2 36.3 37.4 129.0 137.4 175.0 206.3 224.4

Pre-Tax Cost of Debt 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70% 2.70%Years Implied by Year 6 Payment 2.9 2.9 2.9 2.9 2.8 3.3 3.3 3.6 3.7 3.7 4.1Expected Obligation in Year 6 & Beyond 100 104 108 112 116 498.8 548.9 740.5 888.1 958.1 996.4

Present Value of Lease PaymentsPV of Year 1 292.1 301.9 311.6 321.3 331.1 976.0 1005.3 1095.5 1181.2 1305.4 1395.2PV of Year 2 237.0 246.5 256.0 265.5 275.0 810.4 846.2 954.0 1082.4 1207.1 1272.6PV of Year 3 207.7 212.3 216.9 221.6 226.2 656.7 683.0 827.5 986.5 1098.8 1151.6PV of Year 4 157.3 161.8 166.3 170.8 175.3 529.9 560.9 738.3 887.1 977.4 1010.6PV of Year 5 87.5 91.0 94.5 98.0 101.5 436.6 480.4 648.1 777.3 838.6 872.1PV of 6 & beyond 241.0 249.4 257.8 266.1 274.5 1368.8 1513.9 2218.7 2725.5 2883.9 3344.3Capitalized PV of Payments 1222.7 1262.9 1303.1 1343.3 1383.5 4778.4 5089.6 6482.2 7640.0 8311.1 9046.5

Starbucks CorporationEffects of ESOP Exercise and Share Repurchases on Common Stock Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 27Average Time to Maturity (years): 5.20Expected Annual Number of Options Exercised: 5

Current Average Strike Price: 42.13$ Cost of Equity: 6.20%Current Stock Price: $80.15

Fiscal Years Ending Sept. 30 2020E 2021E 2022E 2023E 2024E

Increase in Shares Outstanding: 5 5 5 5 5Average Strike Price: 42.13$ 42.13$ 42.13$ 42.13$ 42.13$ Increase in Common Stock Account: 221 221 221 221 221

Change in Treasury Stock -1,500 -1,500 -1,500 -1,500 -1,500Expected Price of Repurchased Shares: 80.15$ 85.12$ 90.40$ 96.01$ 101.97$ Number of Shares Repurchased: (19) (18) (17) (16) (15)

Shares Outstanding (beginning of the year) 1,220 1,219 1,218 1,216 1,215Plus: Shares Issued Through ESOP 5 5 5 5 5Less: Shares Repurchased in Treasury (19) (18) (17) (16) (15) Shares Outstanding (end of the year) 1,244 1,242 1,239 1,237 1,235

Starbucks Corporation

Valuation of Options Granted under ESOP

Current Stock Price $80.15

Risk Free Rate 1.62%

Current Dividend Yield 1.64%

Annualized St. Dev. of Stock Returns 40.00%

Average Average B-S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 27 42.13 5.20 41.39$ 1,130$

Total 27 42.13$ 5.20 47.14$ 1,130$

Starbucks CorporationSensitivity Tables

96.85 0.60 0.70 0.80 0.89 1.00 1.10 1.20 96.85 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%24.50% 165.85 135.86 114.12 99.12 84.74 74.35 65.81 34.00% 102.72 103.18 103.64 104.10 104.55 105.01 105.47 25.00% 164.74 134.90 113.28 98.36 84.07 73.74 65.25 34.50% 100.33 100.78 101.23 101.68 102.13 102.58 103.02 25.50% 163.62 133.94 112.44 97.60 83.39 73.13 64.69 35.00% 97.95 98.38 98.82 99.26 99.70 100.14 100.58 26.00% 162.51 132.98 111.60 96.85 82.72 72.52 64.13 35.50% 95.56 95.99 96.42 96.85 97.28 97.70 98.13 26.50% 161.39 132.02 110.75 96.09 82.04 71.90 63.57 36.00% 93.17 93.59 94.01 94.43 94.85 95.27 95.69 27.00% 160.27 131.05 109.91 95.33 81.37 71.29 63.01 36.50% 90.78 91.19 91.60 92.01 92.42 92.83 93.24 27.50% 159.14 130.08 109.06 94.57 80.69 70.67 62.45 37.00% 88.40 88.80 89.20 89.60 90.00 90.40 90.80

96.85 0.87% 1.12% 1.37% 1.62% 1.87% 2.12% 2.37%4.30% 163.42 147.65 134.35 122.98 113.15 104.57 97.01 96.85 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75%4.65% 144.18 131.40 120.44 110.94 102.63 95.30 88.78 34.00% 86.13 91.36 97.30 104.10 111.94 121.09 131.92 4.90% 132.71 121.57 111.93 103.50 96.07 89.46 83.56 34.50% 84.14 89.25 95.05 101.68 109.33 118.27 128.84 5.15% 122.72 112.93 104.38 96.85 90.16 84.19 78.82 35.00% 82.15 87.14 92.79 99.26 106.73 115.45 125.76 5.40% 113.95 105.27 97.64 90.86 84.82 79.39 74.49 35.50% 80.16 85.03 90.54 96.85 104.13 112.63 122.69 5.65% 106.18 98.44 91.58 85.46 79.97 75.01 70.51 36.00% 78.17 82.91 88.28 94.43 101.52 109.81 119.61 5.90% 99.25 92.30 86.10 80.55 75.53 70.99 66.85 36.50% 76.18 80.80 86.03 92.01 98.92 106.99 116.53

37.00% 74.20 78.69 83.78 89.60 96.32 104.16 113.45

96.85 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 96.85 26.00% 27.00% 28.00% 29.00% 30.00% 31.00% 32.00%1.95% 81.28 86.36 92.13 98.76 106.45 115.48 126.22 1.81% 113.23 108.40 103.56 98.73 93.90 89.06 84.23 2.20% 80.90 85.91 91.59 98.11 105.66 114.50 125.01 2.01% 112.26 107.43 102.60 97.76 92.93 88.10 83.26 2.45% 80.53 85.46 91.06 97.47 104.88 113.55 123.83 2.11% 111.78 106.95 102.11 97.28 92.45 87.61 82.78 2.70% 80.16 85.03 90.54 96.85 104.13 112.63 122.69 2.20% 111.35 106.51 101.68 96.85 92.01 87.18 82.35 2.95% 79.80 84.60 90.03 96.23 103.39 111.73 121.57 2.61% 109.38 104.54 99.71 94.88 90.04 85.21 80.38 3.20% 79.44 84.17 89.53 95.63 102.67 110.85 120.49 2.81% 108.41 103.58 98.74 93.91 89.08 84.24 79.41 3.45% 79.09 83.76 89.03 95.05 101.96 109.99 119.44 3.01% 107.44 102.61 97.78 92.94 88.11 83.28 78.44

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