Add a Little Flavor Add a Little Flavor With StarbucksWith Starbucks
Presented by:
Chris Huynh
Philip Chiang
Anthony Vu
Phuong Nguyen
Phuong Doan
Vanessa Chiang
Mission StatementMission Statement
Establish Starbucks as the premier purveyor of the Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our finest coffee in the world while maintaining our uncompromising principles while we grow.uncompromising principles while we grow.
Establish Starbucks as the premier purveyor of the Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our finest coffee in the world while maintaining our uncompromising principles while we grow.uncompromising principles while we grow.
The The CreationCreation of of StarbucksStarbucks
The 1980’sThe 1980’so Howard Schultz, the founder of Starbucks, Howard Schultz, the founder of Starbucks,
traveled to Italy to learn of popularity of traveled to Italy to learn of popularity of espresso barsespresso bars
o After returning to the United States, Schultz After returning to the United States, Schultz convinces Starbucks to test the coffee bar convinces Starbucks to test the coffee bar concept in Seattleconcept in Seattle
o Total number of Starbucks locations: 55Total number of Starbucks locations: 55
The 1980’sThe 1980’so Howard Schultz, the founder of Starbucks, Howard Schultz, the founder of Starbucks,
traveled to Italy to learn of popularity of traveled to Italy to learn of popularity of espresso barsespresso bars
o After returning to the United States, Schultz After returning to the United States, Schultz convinces Starbucks to test the coffee bar convinces Starbucks to test the coffee bar concept in Seattleconcept in Seattle
o Total number of Starbucks locations: 55Total number of Starbucks locations: 55
Starbucks become Starbucks become a hita hit
The 1990’sThe 1990’so Completes IPO with common stock being Completes IPO with common stock being
traded on the Nasdaq with the symbol traded on the Nasdaq with the symbol SBUXSBUXo Starbucks begin their fabled partnership with Starbucks begin their fabled partnership with
Barnes & Nobles to establish Starbucks in Barnes & Nobles to establish Starbucks in every Barnes & Nobles book storeevery Barnes & Nobles book store
o Total number of Starbucks location 2,135Total number of Starbucks location 2,135
The 1990’sThe 1990’so Completes IPO with common stock being Completes IPO with common stock being
traded on the Nasdaq with the symbol traded on the Nasdaq with the symbol SBUXSBUXo Starbucks begin their fabled partnership with Starbucks begin their fabled partnership with
Barnes & Nobles to establish Starbucks in Barnes & Nobles to establish Starbucks in every Barnes & Nobles book storeevery Barnes & Nobles book store
o Total number of Starbucks location 2,135Total number of Starbucks location 2,135
The Success of The Success of StarbucksStarbucks
The 2000’sThe 2000’so Started a partnership with T-Mobile ® to Started a partnership with T-Mobile ® to
launch their high-speed wireless internet launch their high-speed wireless internet service in more than 1,200 storesservice in more than 1,200 stores
o Opens Starbucks Coffee Agronomy Company Opens Starbucks Coffee Agronomy Company in San Jose, Californiain San Jose, California
o Current number of stores: 7,225Current number of stores: 7,225
The 2000’sThe 2000’so Started a partnership with T-Mobile ® to Started a partnership with T-Mobile ® to
launch their high-speed wireless internet launch their high-speed wireless internet service in more than 1,200 storesservice in more than 1,200 stores
o Opens Starbucks Coffee Agronomy Company Opens Starbucks Coffee Agronomy Company in San Jose, Californiain San Jose, California
o Current number of stores: 7,225Current number of stores: 7,225
Leaders of Leaders of Starbucks…Starbucks…
Fiscal Year Salary
Orin C. Smith 2003 1,132,762
president and 2002 1,088,269
chief executive officer 2001 995,192
Howard Schultz 2003 1,132,762
chairman and 2002 1,088,269
chief global strategist 2001 995,192
David A. Pace 2003 400,000
executive vice president, 2002 63,077
Partner Resources 2001
Conclusion…Conclusion…Based on some of the positions in the Board of Based on some of the positions in the Board of
Directors, Starbucks is not a family business. Directors, Starbucks is not a family business.
They only hold 5% of Starbucks’ total stock.They only hold 5% of Starbucks’ total stock.
Based on some of the positions in the Board of Based on some of the positions in the Board of Directors, Starbucks is not a family business. Directors, Starbucks is not a family business.
They only hold 5% of Starbucks’ total stock.They only hold 5% of Starbucks’ total stock.
Ever-expanding Ever-expanding Business…Business…
o You can now get your Starbucks’ fix anywhere You can now get your Starbucks’ fix anywhere from:from:
Your local grocery stores Your local grocery stores Airports across the United StatesAirports across the United States Any Hyatt hotel Any Hyatt hotel Universities campusesUniversities campuses
o You can now get your Starbucks’ fix anywhere You can now get your Starbucks’ fix anywhere from:from:
Your local grocery stores Your local grocery stores Airports across the United StatesAirports across the United States Any Hyatt hotel Any Hyatt hotel Universities campusesUniversities campuses
Taking over the Taking over the world…world…
o Starbucks goes international with stores Starbucks goes international with stores opening up in over 34 countries like:opening up in over 34 countries like:
ChinaChina TurkeyTurkey JapanJapan CanadaCanada PeruPeru
o Starbucks goes international with stores Starbucks goes international with stores opening up in over 34 countries like:opening up in over 34 countries like:
ChinaChina TurkeyTurkey JapanJapan CanadaCanada PeruPeru
Total number of International stores: 1,680Total number of International stores: 1,680
Revenues from Revenues from StarbucksStarbucks
85%
15%
Operated RetailStores
SpecialtyOperations
Where Does it Where Does it Come From?Come From?
Retail Operations
78%
12%
5% 5%
Coffee
FoodItemsCoffeeBeanCoffeeEquip.
Retail Operations
78%
12%
5% 5%
Coffee
FoodItemsCoffeeBeanCoffeeEquip.
Speciality Operations
39%
25%
1%
27%
8%Royalties
GrocerySalesLicensingRightsPartnerships
E-Commerce
Financial RatiosFinancial RatiosGrowth Growth RatiosRatios
StarbucksStarbucks IndustryIndustry S & P 500S & P 500 AssessmentAssessment
SalesSales 27.727.7 27.327.3 8.88.8 StrongStrong
EPS (Qtr.)EPS (Qtr.) 38.638.6 37.437.4 610.2610.2 FairFair
Price RatiosPrice Ratios
Current P/E Current P/E 52.952.9 57.057.0 23.623.6 PoorPoor
Price/Sales Price/Sales 3.563.56 3.693.69 1.611.61 PoorPoor
Profit Profit MarginsMargins
Growth Growth MarginMargin
58.358.3 58.458.4 47.847.8 FairFair
Pre-tax Pre-tax MarginMargin
11.211.2 10.710.7 10.410.4 FairFair
Financial Ratios Financial Ratios Continue…Continue…
Financial Financial ConditionsConditions
StarbucksStarbucks IndustryIndustry S & P 500S & P 500 AssessmentAssessment
Current Current RatioRatio
1.61.6 1.51.5 1.61.6 GoodGood
Quick RatioQuick Ratio 1.01.0 0.80.8 1.21.2 FairFair
Investment Investment (%)(%)
ROEROE 13.413.4 13.013.0 13.713.7 FairFair
ROAROA 9.89.8 9.99.9 2.22.2 FairFair
Mgmt Mgmt EfficiencyEfficiency
Inventory Inventory TurnoverTurnover
7.07.0 6.06.0 8.18.1 PoorPoor
Receivable Receivable TurnoverTurnover
37.237.2 37.737.7 5.65.6 PoorPoor
Holding Period Holding Period ReturnReturnHolding Period Return
2004 (3/31)
2003 2002 2001 2000
Earnings Growth Earnings Growth Est.Est.
0.314
DividendsDividends 0 0 0 0 0
Average PriceAverage Price 37.6 25.76 23.13 19.35 44.81
HPR 0.46 0.113705 0.195349 -0.052
Conclusion…Conclusion…Holding Period Return increased from .11 to .46 Holding Period Return increased from .11 to .46
in 2003. Starbucks has had a positive Holding in 2003. Starbucks has had a positive Holding Period Return since 2002.Period Return since 2002.
Holding Period Return increased from .11 to .46 Holding Period Return increased from .11 to .46 in 2003. Starbucks has had a positive Holding in 2003. Starbucks has had a positive Holding Period Return since 2002.Period Return since 2002.
Risk Analysis Risk Analysis 2004 2003 2002 2001
Unlevered Beta 0.144190999 0.665079471 0.692629823
[Equity/(Equity +((1-T)Debt))]* BetaEquity=Beta_unlevered
Equity 2,082,427 1,723,189 1,375,927
Debt 647,319 491,203 475,112
Income from continuing operations before income taxes 436,335 338,999 288,047
Provision for income tax 167,989 126,313 107,712
Tax rate 0.385000057 0.372605819 0.373938975
Beta SBUX 0.236617495 0.17175624 0.784023358 0.842363146
Beta= COV(RIBM, RS&P500)/VAR(RS&P500)
Conclusion…Conclusion…
o Beta (Systematic Risk)Beta (Systematic Risk) 2004: .23662004: .2366
o Unlevered BetaUnlevered Beta 2003: .14412003: .1441
o Beta (Systematic Risk)Beta (Systematic Risk) 2004: .23662004: .2366
o Unlevered BetaUnlevered Beta 2003: .14412003: .1441
Beta has increased since 2004 even though in Beta has increased since 2004 even though in 2003, Beta dropped from .78 to .17.2003, Beta dropped from .78 to .17.
Discounted Cash Flow Discounted Cash Flow and…and…
.Ke(Discounted cash flow (DCF) model) 2004(1/31) 2003 2002 2001
P0=(FCFE1/
Shares0)/(Ke0-
G1)
FCFE 12/31/2004 215,936,190 164,335,000 -102,887,000 -27,545,000
ke0=[(FCFE1/
shares0)/P0]
+G1
shares outstanding 3,937,000,000 393,692,536 388,228,592 380,044,302
G1=(FCFE1-
FCFE0)/FCFE0
G 03/31/2004 0.314 -2.597237746 -2.735233255 0.684810967
P 1/31/2004 32.9 25.76 23.13 19.35
Ke(required return on equity) 0.330671 0.3352922 -2.578937 -2.7492241
CAPMCAPM2004(1/31) 2003 2002 2001 2000
.Ke (CAPM) Rf 0.009 0.01 0.0163 0.0386
Ke= Rf +
Beta(Rm-Rf) 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
Conclusion…Conclusion…Since Starbucks does not pay dividends to their Since Starbucks does not pay dividends to their
stockholders, the DCF analysis (.33%) is not a stockholders, the DCF analysis (.33%) is not a good measurement for Starbucks. CAPM good measurement for Starbucks. CAPM (1.21%) is a better measurement for (1.21%) is a better measurement for Starbucks.Starbucks.
Since Starbucks does not pay dividends to their Since Starbucks does not pay dividends to their stockholders, the DCF analysis (.33%) is not a stockholders, the DCF analysis (.33%) is not a good measurement for Starbucks. CAPM good measurement for Starbucks. CAPM (1.21%) is a better measurement for (1.21%) is a better measurement for Starbucks.Starbucks.
Evaluation of Evaluation of SBUX…SBUX…
2003 2002 2001
We= Equity/(Equity+Debt+Preferred Stock) 0.762865 0.778177 0.743327
Wd=Debt/(Equity+Debt+Preferred Stock) 0.237135 0.221823 0.256673
Wp=Preferrd stock/(Equity+Debt+Preferred Stock) 0 0 0
Ke 0.08 0.076 0.14
Kd 0.056 0.05 0.12
Kp 0 0 0
WACC=We*Ke + Wd*kd*(1-T)+ Wp*Kp WACC 0.069196 0.0661 0.123349
Conclusion…Conclusion…With a decrease from 2001 to 2002, the firm has With a decrease from 2001 to 2002, the firm has
increased their value: stating the lower the increased their value: stating the lower the WACC means the greater the firm valueWACC means the greater the firm value
With a decrease from 2001 to 2002, the firm has With a decrease from 2001 to 2002, the firm has increased their value: stating the lower the increased their value: stating the lower the WACC means the greater the firm valueWACC means the greater the firm value
2003 Capital 2003 Capital StructureStructure
24%
76%
Debt
Equity
MM PropositionMM Proposition0.05241
0.0482
0.04901
0.046
0.047
0.048
0.049
0.05
0.051
0.052
0.053
0.23 0.22 0.25
D/TA
WA
CC
Based on the chart, Starbucks belongs to Based on the chart, Starbucks belongs to Model 3. There is a 22% optimal capital Model 3. There is a 22% optimal capital structure based on a three year analysis.structure based on a three year analysis. A A ten year analysis would provide better ten year analysis would provide better accuracy.accuracy.
Market EfficiencyMarket Efficiency4/8/2004: Announced plans to create an alcohol coffee 4/8/2004: Announced plans to create an alcohol coffee
with Jim Bean to be sold at restaurants. (No Form)with Jim Bean to be sold at restaurants. (No Form)4/8/2004: Announced plans to create an alcohol coffee 4/8/2004: Announced plans to create an alcohol coffee
with Jim Bean to be sold at restaurants. (No Form)with Jim Bean to be sold at restaurants. (No Form)
4/8/2004: 4/8/2004: 39.1439.14
4/12/2004:4/12/2004:
39.2039.20
4/13/2004: 4/13/2004: 38.4838.48
Market EfficiencyMarket Efficiency3/31/2004: Alan Greenspan, Chief Executive to 3/31/2004: Alan Greenspan, Chief Executive to
the Federal Bank is rumored to be ill. (No Form)the Federal Bank is rumored to be ill. (No Form)3/31/2004: Alan Greenspan, Chief Executive to 3/31/2004: Alan Greenspan, Chief Executive to
the Federal Bank is rumored to be ill. (No Form)the Federal Bank is rumored to be ill. (No Form)
3/31/2004: 3/31/2004: 38.8738.87
4/1/2004:4/1/2004:
38.2338.23
4/2/2004:4/2/2004:
39.3039.30
Five Year Price Five Year Price IndexIndex
By looking at the five year price index you can see that the By looking at the five year price index you can see that the stock prices of Starbucks fluctuate a lot. In September of stock prices of Starbucks fluctuate a lot. In September of 2001 it suffered a large decline due to the terrorist attacks. At 2001 it suffered a large decline due to the terrorist attacks. At the moment, Starbucks is currently experiencing its highest the moment, Starbucks is currently experiencing its highest stock prices. stock prices.
What to do…What to do…
Recommendations Current
1 Month Ago
2 Months Ago
3 Months Ago
Strong Buy 4 4 4 4 Moderate Buy 1 1 1 1 Hold 9 9 9 9 Moderate Sell 1 1 1 1 Strong Sell 0 0 0 0 Mean Rec. 2.47 2.47 2.47 2.47
Strengths and Strengths and WeaknessesWeaknesses
o Holding Period Return is Holding Period Return is POSITIVEPOSITIVE
o Revenues have grown Revenues have grown over 24% in 2003over 24% in 2003
o Capital Structure is Capital Structure is STABLESTABLE
o Low Debt RatioLow Debt Ratioo Stock Scouter rates Stock Scouter rates
Starbucks 9 out of 10Starbucks 9 out of 10
o Holding Period Return is Holding Period Return is POSITIVEPOSITIVE
o Revenues have grown Revenues have grown over 24% in 2003over 24% in 2003
o Capital Structure is Capital Structure is STABLESTABLE
o Low Debt RatioLow Debt Ratioo Stock Scouter rates Stock Scouter rates
Starbucks 9 out of 10Starbucks 9 out of 10
o Never paid a dividendNever paid a dividendo Price Ratios are poorPrice Ratios are pooro Beta increased since Beta increased since
20022002
o Never paid a dividendNever paid a dividendo Price Ratios are poorPrice Ratios are pooro Beta increased since Beta increased since
20022002
In Conclusion…In Conclusion…The group decided that people should Hold or The group decided that people should Hold or
Moderately Buy Starbucks since HPR is Moderately Buy Starbucks since HPR is expected to increase and that Starbucks is expected to increase and that Starbucks is underpriced. underpriced.
The group decided that people should Hold or The group decided that people should Hold or Moderately Buy Starbucks since HPR is Moderately Buy Starbucks since HPR is expected to increase and that Starbucks is expected to increase and that Starbucks is underpriced. underpriced.
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