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Page 1: starbucks (2)

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

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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.

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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

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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

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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

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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  

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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.

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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

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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

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Revenues from Revenues from StarbucksStarbucks

85%

15%

Operated RetailStores

SpecialtyOperations

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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

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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

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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

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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

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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.

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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)

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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.

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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

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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

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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.

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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

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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

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2003 Capital 2003 Capital StructureStructure

24%

76%

Debt

Equity

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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.

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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

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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

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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.

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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

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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

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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.