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Bloomsburg Investment GroupEquity Analysis

Starbucks (SBUX)Analyst:

Alexandra Papageorgiou & Andrew Peapos Class of 2021Kay Possenti Class of 2022

Corporate Details:

Name

Ticker

Domicile

Sector

Industry

Exchange

Last Close

Price 52 Wk High

Price 52 Wk Low

Latest Dividend

Dividend Yield % TTM

Beta 5 Yr (MoEnd)

Avg Daily Volume (3 Mo)

Shares Outstanding (mil)

Number of Analysts

Starbucks Corp

SBUX

United States

Consumer Cyclical

IG000DA275

NASDAQ

82.43

99.72

60.42

0.41

1.75

0.52

6,467,853.63

1,184.60

5

Corporate Summary:

SBUX operates as a roaster, marketer, and retailer of specialty coffee worldwide. Headquartered in Seattle, Washington, SBUX operates in 78 different segments including, Americas, China/Asia, Europe, Middle East, and Africa. It offers coffee, tea beverages, packaged whole bean and ground coffee, juices, bottled water, and various food items such as fresh fruit and pastries, as well as beverage making equipment and accessories. SBUX has recently been aggressive with their expansion into Asian markets opening roughly a store a day in China. SBUX boast more than 28,000 company operated and licensed stores worldwide. SBUX also is growing their Reserve Roasteries, which are premium coffee shops with an over the top high-end feel for a premium price. SBUX fastest growing segments are in India and China Starbucks first started in operation in 1971, and their CEO is Kevin Johnson.

Bloomsburg Investment Group Opinion:

As a sector, we believe that Starbucks (SBUX) is a strong hold for our portfolio. First, there is a huge gain to be made in the Chinese coffee market, and we believe SBUX will be able to continue the growth and the strides they have made in this market. Second, looking at the prior economic downturns, we can see SBUX was able to maintain strong revenues despite the slowdown. Additionally, we believe that SBUX has a stronger consumer connection than it did 10 years ago, which will provide more strength during future economic ups and downs. Third, Starbucks is working to further diversify their menu past only coffee, and a major push towards shaping their food segment, which can lead to more revenue per single transaction. Lastly, with the licensing and expansion of their mobile apps and loyalty programs, we see Starbucks having a better and stronger ability to gain a bigger consumer base. For the reasons above, the consumer discretionary sector views Starbucks as steady hold for our portfolio.

of 7US Dollar11/12/2019 Starbucks Corp

Source: Morningstar Direct

Starbucks CorpSBUX

Financial Summary, Year End 2013 (in millions)

Market Capitaliza�on

Total Revenue

Gross Profit

Opera�ng Income

Net Income Cont Ops

Net Income

Current Assets

Cash

Total Assets

Current Liabili�es

Longterm Liabili�es

Total Liabili�es

Total Equity

Opera�ng Cash Flow

Inves�ng Cash Flow

Financing Cash Flow

Change In Cash

EBITDA

Enterprise Value

Capital Expenditure

P/E Ra�o Forward

PEG Ra�o

Dividend Yield % TTM

97,646.58

24,719.50

7,351.80

3,806.50

4,518.00

4,518.30

12,494.20

8,937.80

24,156.40

5,684.20

17,296.40

1,169.50

11,937.80

2,361.50

3,242.80

6,333.50

7,256.20

106,056.48

1,976.40

27.03

2.34

1.75

Financial Highlights

Revenue Strength- Starbucks has had continuous increase in revenue over the years.

Beta – Starbucks has beta of .52, which has decreased from .59 last year.

Dividends- Constantly increasing dividend to $1.49

Gross margin- Able to maintain steady margin year after year holding around 30%

China Store Growth- Up 17% versus prior year

Investment Growth

Time Period: 11/1/2016 to 10/31/2019

1/2017 4/2017 7/2017 10/2017 1/2018 4/2018 7/2018 10/2018 1/2019 4/2019 7/2019 10/2019-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Starbucks Corp 69.1% S&P 500 TR USD 51.7%



Starbucks CorpSBUX

Starbucks licenses its Technology

Starbucks is licensing its mobile and loyalty program technology to Brightloom, which will give global franchisees the chance to offer the Starbucks mobile app to customers. Once the software from Starbucks is integrated into its system, Brightloom plans to provide its technology platform to other restaurant companies and operators of licensed Starbucks stores.

Push Towards Eco- Friendly

Starbucks has a goal of eliminating one-time use plastic straws entirely by 2020. They have added “adult sippy cups” as an alternative to single-use plastic straws, but they are also planning to create new straws that are made from materials that are safe for the environment, instead of the usual plastic.

Hiring veterans

Starbucks has met their goal of hiring 25,000 veterans after 6 years when the company first decided to do more for our country’s service members. Additionally they plan on expanding by hiring 5,000 more annually.

Starbucks Touch Pens

Starbucks has released new hardware for some of their foreign markets. Including Japan, where they are selling pens with NFC- wallets, which helps Starbucks become more adaptable to these paperless societies. These wallets work with touch pay technology, and are actual pens also.



Starbucks CorpSBUX

Investment Growth

Time Period: 11/1/2014 to 10/31/2019

4/2015 10/2015 4/2016 10/2016 4/2017 10/2017 4/2018 10/2018 4/2019 10/2019-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

Starbucks Corp 144.2% McDonald's Corp 141.6% Dunkin' Brands Group Inc 93.3%Coca-Cola Co 52.9%

Competitor Comparison (Cont.)

AssetTurnover

ROA %

TotalDebt

to TotalEquity

ROE % Beta 5 YrP/E

RatioForward

PEG RatioP/B

RatioCurrent

DividendYield %

TTM

FreeCash

Flow /Sales %

TTMStarbucks CorpMcDonald's CorpDunkin' Brands Group IncCoca-Cola Co 0.37 7.52 2.56 37.79 0.46 23.04 3.89 11.87 3.07 24.44

1.28 23.46 8.07 136.51 0.52 27.03 2.34 1.75 40.37

0.36 6.22 0.44 23.04 2.85 1.97 19.450.63 17.79 0.47 22.83 2.75 2.41 24.93

Competitor Comparison

Revenue(mil)

Revenue %Chg

GrossProfit(mil)

GrossMargin %

NetIncome

(mil)

NetIncome %

Chg

NetMargin %

MarketCap

(mil)(Daily)

CurrentRatio

ReceivableTurnover

Starbucks Corp

McDonald's Corp

Dunkin' Brands Group Inc

Coca-Cola Co 31,856.00 -10.04 20,086.00 63.05 6,434.00 415.54 20.20 222,108.03 1.05 9.02

21,025.20 -7.87 10,786.00 51.30 5,924.30 14.10 28.18 145,075.90 1.36 9.52

24,719.50 10.42 7,351.80 29.74 4,518.30 56.63 18.28 97,646.58 2.20 31.62

1,321.62 3.61 1,186.10 89.75 229.91 -15.23 17.40 6,180.92 1.51 18.17

Industry Environment:

Starbucks Corporation operates in a competitive industry where switching costs for the consumers are low, substitutes are high, and new entrants are frequent (Luckin). The overall industry operates in two categories; shops that specialize in coffee (Dunkin, Costa) and fast food chains who offer coffee (McDonald's, Wendy's). Starbucks has continues to grow the spot of largest coffee chain in the world due to the ability to sell itself separate from the competition by offering comfort in stores, a superior product, and the highest customer service. As touched on earlier they remain ahead of there competition in supply chain management with partnerships from Pepsi and Nestle to distribute and sell products under the franchise name. There strong brand image and ability to pick up on social trends (go green) and norms are the main ingredient for the empire on coffee. Flashy ad campaigns (Christmas cups) and seasonal drinks are another key success in differentiating in such a similar industry environment.



Starbucks CorpSBUX

Strengths:

-Brand recognition and loyalty- SBUX is selling the “Starbucks Experience” not just a cup of coffee, which supports their ability to charge higher prices per cup of coffee..

-Strong Market Presence- Starbucks continues to be the leader in market share 39.8% in the United States and operates with over 29,000 stores in 71 countries

-Rewards program- Starbucks continually engages with customers based on the revamped stars rewards program. Members will earn two stars for every $1, perks like double star day, and bonus stars based on in app games played. 25 stars is the first reward you can earn.

-Ability to adapt to foreign markets (success story in China)-4000 stores in 160 cities with over 55,000 partners, they engage in serving the chinease community by helping asian farmers. Also have donated over 20 million dollars to helping chinese communities.

-Strong supply chain and distribution networks- Starbucks has been signing deals with partners, such as Nestle and Pepsi. These deals allow Starbucks to continually market, sell, and distribute their products to a larger customer base.

Weaknesses:

Higher prices - Starbucks is more of a luxury coffee brand compared to their competitors. The company operates on a per cup higher profit margin than competitors, an economic downturn could easily sway customers to go elsewhere for the same product.

Lack of uniqueness- Starbucks remains strong in the core coffee and tea business, but does not have that much diversification outside of beverages. While being overly diversified can be a bad thing, the same can be said for a company with many different combinations for only two products.

Currency exchange rates -As an international company, Starbucks faces a multitude of fluctuating currency rates. If economic events move currency rates in a negative trend against Starbucks, their revenue can be deeply hurt.

Health Factors- Because SBUX is high in sugar and calories, in comparison to other brands, this could cause health attentive consumer to look somewhere else for their morning coffee.

Unfavorable Environmental Impact- A variety of Starbucks drinks come in plastic cups that are not easily recyclable, and the multitude of one-time use plastic straws being handed out per day.

Opportunities:

-Expanded growth in India/China- As the US, is Starbucks largest and most profitable market, experiences slower traffic growth, they will increasingly look to China as their primary growth driver. They are opening new restaurants in China at an aggressive pace, about 600 stores annually.

-Leveraging social media- Starbucks uses social media platforms such as Facebook and Twitter to promote limited-time deals and offers and communicate with their customers. The brand has been mentioned by high-profile celebrities which has drawn more attention to their accounts.

-Continue to update menu outside of coffee- Starbucks is continually increasing their food menu options, in order to expand the company’s footprint. They are targeting high demand trends, such as high protein and snacking menu options, to show their ability to give a modern innovative experience.

-Future licensing expansion- Starbucks has been using various licensing agreements, in order to expand their company’s capabilities past what they can offer. This includes licensing agreements to develop and expand their mobile app for higher efficiency, agreements to further expand out of U.S. territory, and distribution agreements to expand where their products reach.

Threats:

-Increasing competition from home players (Costa in UK and Luckin in China) - over saturation- In 2018, Starbucks announced that they will close 150 underperforming US stores in 2019 because of over-saturation. Starbucks plans to continue to expand, but they plan to target areas with fewer coffee shops because of increasing competition from trendy, independent neighborhood coffee shops.

-Arabica volatility in market (based on natural disasters)-Starbucks is warning of a threat to world coffee supply because of climate change. Even well-established farms are seeing a drop in crop yield, and that could well discourage growers from cultivating coffee in the future, constricting supply.

-Uncertainty in China regarding tariffs- China continues to be the fastest growing market, with a weak yuan compared to US dollar it will likely affect earnings. With Luckin Coffee becoming the home brand, consumers may shift to the competition as US and China continue to argue.

Competition in US- Low priced coffee brands and fast food chains, such as Dunkin' Donuts, McDonald's, and local coffee shops are major competitors to SBUX. This increase in competition has led to slower growth in the US, and during times of economic slowdown we could see a shift towards these brands.



Starbucks CorpSBUX

Valuation: Discount Cash Flow Model (DCF)

Using the Discounted Cash Flow Model, the group obtained an intrinsic value of 97.71. We believe this number is slightly high relative to the current stock price. The group calculated the fair value using the cost of equity rather than the WACC because SBUX uses equity more than debt to finance operations. The group increased interest expense as Starbucks takes on more debt to finance their expansion, and had deceased operating income as more expenses arise from moving into China.

Valuation: Discount Dividend Model (DDM)

Using the DDM model, the group found the fair intrinsic value of the stock to be $91.37. We believe that this number is accurate, as Starbucks has a strong continuing ability to increase their dividends.

Valuation: Multiple Valuation

Using the price to sales valuation, we found the value to be 3.97. While their competitors, McDonalds and Dunkin have P/S ratios of 6.98 and 4.67, SBUX has a much lower ratio, which means SBUX is considered a more attractive investment. This tells us how much the market values for every dollar of sales.



Starbucks CorpSBUX

Bloomsburg Investment Group Disclaimer

This report was developed by student members of the Bloomsburg Investment Group (BIG).The purpose of the report is to provide research analysis of securities to potential and existingdonors of The BIG Fund. The report is designed to exemplify the abilities of our membersthrough investment research and analysis. Analysts of the Bloomsburg Investment Group andThe BIG Fund are not registered brokers, investment advisors, or licensed financialprofessionals.The generated opinion of our analysts is not an offer or solicitation to buy or sellany security,and due diligence is recommended before making any financial transaction.Information included in this report was compiled from different public sources. Not allrelevant data wasincluded into the report, and accuracy is not guaranteed. Students, faculty,and staff of Bloomsburg University may have a financial interest in any company listed in thisreport.

Sources Cited

WSJCapital IQStarbuckMorningstar DirectYahoo FinanceBarronsForbesCNBCWashingtonpostBusinesswireNew York Times CNN



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