UNIVERSITY OF OREGON
INVESTMENT GROUP
May 29, 2009
Consumer Goods
STARBUCKS CORPORATION (SBUX)
BUY
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
Current
Price(06/15/2009)
Dividend
Valuation (per share)
DCF Analysis
Comparables Analysis
Target Price
Current Price
(6/15/2009)
Undervaluation
$ 7.06 - 18.56
SBUX/NYSE
1.26
735.90 million
14,085,100
9,567 million
$14.06
N/A
$
$
$
$
15.25
24.23
17.95
14.06
27.64%
Summary Financials
Revenue
Income
2008
10,383 Million
582 Million
BUSINESS OVERVIEW
Starbucks Corporation (NASDAQ: SBUX) was started in Pike Place Market in Seattle, Washington, in 1971.
Through nearly two decades growth and expansion, Starbucks became the world‘s leading coffee retailer and
international coffee house chain now. Starbucks mainly provides coffees, lattes, espresso, mocha, cold blend
beverages, along with a variety of complementary food items. In addition, Starbucks sells coffee and tea products,
such as coffee beans and drinking mugs, and licenses its trademark through other channels such as licensed retail
stores. Company-owned retail stores provided 84% of Starbucks‘ 2008 net sales and 76% of that business was in
beverages. On Sep 30, 2008, Starbucks had 9217 stores, but it decreased at an accelerated rate due to the downturn
economy and its overexpansion.
Covering Analyst: Howard Yang
Email: Haoliang@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member
students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG
may have clerked, interned or held various employment positions with firms held in UOIG’s porfolio. In addition, members of UOIG
may attempt to obtain employment positions with firms held in UOIG’s portfolio.
Starbucks Corporation
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Starbucks has become synonymous with the highest quality coffee, a welcoming environment, personalized service
and a passion for innovation.
 Customers can enjoy a relaxing atmosphere along with the high-quality whole bean coffee beverages
 By providing premium coffee and related products through a unique Starbucks Experience, Starbucks
attempts to become the leading retailer and brand of coffee. Its Starbucks Experience is a third place
beyond home and work, built upon superior customer service as well as clean and well-maintained retail
stores that reflect the atmosphere of the communities. Concentrating in a unique Starbucks Experience of
each customer‘s consuming experience, Starbucks satisfy the customer needs and thereby building a high
degree of customer loyalty.
 Building on its ongoing global coffee sustainability commitment to coffee farms and cooperatives
throughout the world, Starbucks on establishing long-term relationship with coffee farmers and their
communities and take the social responsibility.
 Through Shared Planet Program, Starbucks commits to its social, environmental and economic impacts in
the communities.
Fiscal Year Ended
Beverages
Food
Coffee-making equipment
and other merchandise
Whole bean coffees
Total
2008
76%
17%
2007
75%
17%
2006
77%
15%
4%
3%
100%
5%
3%
100%
5%
3%
100%
BUSINESS SEGMENT
Starbucks has two main categories of stores – company-owned stores (7035 domestically and 2069 internationally)
and licensed stores (4411 domestically and 3347 internationally). The former stores are the familiar, free-standing
stores that are found in strip malls, downtown storefronts, and freestanding buildings. The latter category is the
newer creation that is found in establishments such as Safeway and Target. These licensed stores are not franchises
in the traditional sense, but are instead partnerships with other companies that will provide access into new markets.
Starbucks Company-operated retail stores accounted for 84% of total net revenues during fiscal 2008.
Revenues
Company -operated Retails
Specialty
licensing
Packaged coffee and tea
Branded products
Total licensing
Foodservice and other
Foodservice
Other initiatives
Total foodservice and other
Total specialty
Total net revenues
% of total net revenues
84%
% of Specialty Revenues
8%
3%
1%
12%
48%
21%
4%
73%
4%
1%
4%
16%
100%
25%
2%
27%
100%
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Company-operated retails (84%)
Starbucks Company-operated retail stores accounted for 84% of total net revenues during fiscal 2008 by providing
beverage, such as coffee or tea, and related products, such as snacks, mugs, etc through its retail stores. Starbucks
believes that its Starbucks Experience is the key to compete with other competitors.
Starbucks selectively locates stores where are typically located in high-traffic, high-visibility locations, such as
shopping malls, company-operated and licensed stores, supermarkets, & local grocery, hotels, colleges and
universities, business and industry cafeteria, healthcare, other foodservice venues, providing convenient access for
both pedestrians and drivers. Starbucks has continued to expand development of drive-thru retail stores. At the end
of fiscal 2008, the Company operated approximately 2,800 drive-thru locations.
Specialty operations (16%)
Starbucks wants to take advantage of third parties to reach customers where they work, travel, shop and relax.
These relationships take various forms, including licensing business, foodservice and other initiatives related to the
company‘s core businesses.
Licensing — Retail stores
Through training classes and share store operating development experience, employees working in licensed retail
locations are required to follow Starbucks detailed store operating procedures similar to those employees in
Company-operated stores. In this way, Starbucks receives license fees and royalties and sells coffee, tea and related
products for resale in licensed locations.
Licensing — Packaged coffee and tea
Cooperated with Kraft Foods, Inc., Starbucks sells Starbucks and Seattle‘s Best Coffee branded packaged coffees
and Tazo teas in grocery and warehouse club stores, such as Costco, Wal-Mart, Safeway, and grocery stores,
throughout the United States. Kraft manages all distribution, marketing, advertising and promotion of these
products.
Licensing — Branded products
The Company licenses the rights to produce and market Starbucks branded products
through several partnerships both domestically and internationally. Significant licensing
agreements include:

The North American Coffee Partnership, a joint venture with the Pepsi-Cola
Company, produces and sells ready-to-drink beverages, including bottled Frappuccino
beverages and Starbucks DoubleShot espresso drinks.

Cooperated with Unilever and Pepsi-Cola Company for the
manufacturing, marketing and distribution of Starbucks superpremium Tazo Tea ready-to-drink beverages in the US, Canada and
Mexico.

Offer unique drink to local market, such as Starbucks Discoveries in Japan and South Korea.
3
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Foodservice
There is an increasingly evident that a strong food platform is essential as a complement to beverage offerings in
coffee house. Food platforms are a key complement to beverages and breakfast sandwiches, muffins, scones,
pastries, prepared breakfast and lunch sandwiches are seeing the biggest growth on menus. So far, Starbucks has
cooperated with national widespread distribution networks provided SYSCO Corporation and US Foodservice to
provide foodservice sales.
International Growth
Asia Pacific
Japan
China
South Korea
Taiwan
Philippines
Malaysia
Indonesia
New Zealand
Total
Europe/Middle East/Africa
814
Turkey
269
Spain
254
Greece
221
United Arab Emirates
150
Saudi Arabia
113
Kuwait
69
France
43
Switzerland
Other
1,933
Total
107
76
76
69
65
57
46
42
147
685
Americas
United States
Mexico
Canada
Other
Total
4,329
241
231
44
4,845
Starbucks has its stores including license stores in more than 30 countries. Based on number of retail stores,
Canada, Japan and the UK are current the International segment‘s largest markets. Starbucks is seeing and focus on
international expansions. In 2009, Starbucks is only closing net 20 stores in USA, but planning to open nearly 700
stores.
To meet the competition and track customer needs, companies are also expanding gourmet coffee beverage
platforms to another level. Espresso-based coffee drinks such as lattees and mochas have seen the greatest growth
during the past two years, yet iced coffee, tea—both iced and hot—as well as soda have also had impressive growth.
There is widespread concern about the ‗Green‘ activities, which are undertaking a variety of friendly and responsible.
As previously mentioned, Starbucks‘ major revenue generator is the sale of espresso drinks. However, the company
has had its hands in many other arenas as well, including coffee hardware, whole-bean coffees for home use, snacks,
smoothies, and entertainment media. These represent different ways that Starbucks attempts to diversify its
portfolio of offerings to (a) differentiate itself from competitors and (b) reduce the impact of any weakening
demand for espresso drinks.
RECENT NEWS


May 25, 2009-- A small explosion this morning outside a Starbucks Corp. coffee shop on Manhattan‘s
Upper East Side shattered windows and caused the evacuation of residents who live in the five-story
building.
Under withering attack from the likes of McDonald's new Mickey-Come-Lately McCafe, Uncle Howard has
launched a print-and-internet counteroffensive. On a background of burlap, the print ads proclaim
"Starbucks or Nothing. Because compromise leaves a really bad aftertaste." (Take that, Mickey!) Says
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
another, "If your coffee isn‘t perfect, we‘ll make it over. If it‘s still not perfect, make sure you're in a
Starbucks." (Take that, Dunkin!) (Starbucks Spreads the Word on Burlap)1
Starbucks launched the new Starbucks VIA™ Ready Brew instant coffee, expected expansion overseas and
boost its sales.
Recent events have not been kind to Starbucks. The proliferation of company and licensed stores that began in the
mid-1990s is now creating oversaturation in many markets. New stores were being built too close to established
outlets and stores cannibalized business from one another and reduced operational efficiency. In early 2008,
founder Howard Schultz resumed the CEO role he left in 2000 and vowed to right the ship. "We have to get back
to what made this company great, and that is to have the courage and curiosity, and commitment, to do things that
have not been done before,‖ said Schultz.
INDUSTRY
Coffee Industry Overview
The major products and services in this industry are: Roasted coffee bean, ground coffee and tea. This segment's
share of industry revenue and profit has largely remained unchanged over the past five years as people continued to
consume coffee in their homes and at work. The industry is expected to grow by 2.9% to reach nearly $7 billion in
revenues. IBISWorld forecasts the Coffee and Tea Production industry will achieve revenue of $7.2 billion in 2009,
which will represent an industry revenue increase of 2.6%. Coffee and tea are accounts for the total revenue 86%
and 14% respectively.
In general, the average coffee consumption per capita in the United States is around 4.4 Kg. Among coffee drinkers
the average coffee consumption in the United States is 3.1 cups of coffee per day. Per capita men drink
approximately 1.9 cups per day, whereas women drink an average of 1.4 cups of coffee a day.
The general trend in the coffeehouses and donut shops industry has been substantial, perpetual growth. During
2005-07, sales for the top six leaders in the industry grew 30.4%, from $9.65 billion to $12.6 billion. This growth is
significantly attributed to social trends arising from the popularity of the coffeehouse culture and high volume
brewing and consumption. Much of this growth and increase in attractiveness is credited to companies such as
Starbucks and Caribou Coffee and similar coffeehouse‘s massive cultural influence on a leisurely, coffee-drinking
way of life. According to the New York-based National Coffee Association of USA (NCA), over 50% of Americans
consume coffee at least once a day. Whether in the morning to start the day, or a happy complement to a good
book and a warm blanket, coffee is part of national culture.
The competitors in the same strategic group with Starbucks almost have the same competitive advantages. In
general, Starbucks competes with other competitors with its stronger brand image and more distribution channels
(shops & grocery stores). However, as mentioned, brand image might be not important to customers and
coffeehouses are everywhere. Luckily, the whole coffee market is still growing, especially international market. For
example, Starbucks is very successful at Asian market. Drinking coffee in Asia is more like a fashion, not part of
daily life. Starbucks is the pioneer to make this fashion. Thus, Starbucks still gains huge profit at Asian market.
Brand image is an advantage for Starbucks, but somehow it also could be disadvantage for Starbucks. Some people
obsessed with its gourmet coffee, yet there are groups who dislike Starbucks coffee. It might be because people
don‘t care or don‘t think there is any difference between brands and generic or just don‘t want to have the same
coffee every day. The other competitors, donut shops and independent coffeehouses, in the same group don‘t have
this problem because they are not as big as Starbucks. In order to improve this complex situation, being careful to
1
http://seattlest.com/2009/05/26/starbucks_spreads_the_word_on_burla.php
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pick up good location to open new branches, such as the location on campus or in company might be a good idea,
―forcing‖ people get used to Starbucks and when they want to have coffee, Starbucks is the only choice. In addition,
providing more kinds of coffee products might work too. More choice for customers would lure more potential
customers.
The National Coffee Association of U.S.A., Inc. (NCA), a leading trade organization for the coffee industry in the
U.S established in 1911, is keeping tracking of habits and practices of coffee beverages consumption, such as
cappuccino, espresso, latte, mocha and iced coffee blended with ice. In its 2008 National Coffee Drinking Trends
Report, there are some highlights about the coffee consumption trends as follows:
 The report also shows that daily consumption of coffee beverages among consumers remained consistent in
2009 with 54% of the overall adult population partaking.

Consumption of cups per day by consumers age 18-24 declined from 3.2 cups per day in 2008 to 2.9 cups in
2009.

The percentage of adult age 25-39 drinking any type of coffee rebounded to 47%, matching the high point
of this decade. 18-to-24-year-olds dropped for the first time this decade from a high of 37% in 2007 to 26%
in 2008 mainly due to low income of this ages group and economy softness.
Age/Year
18-24
25-39
40-59
60-older
2008
26%
47%
61%
71%
2007
37%
44%
61%
74%
2006
31%
47%
59%
73%
IBISWorld estimates that the continuing slow economy will see a further small decline in per capita consumption of
coffee in 2009. Specifically, IBISWorld forecasts that coffee consumption will decrease by 1.4% to 7 pounds per
capita.
Over the remainder of the outlook period, coffee consumption is forecast to increase at an annualized rate of 0.8%
to 7.3 pounds per capita in 2014. The US dollar is forecast to improve, which will decrease the price of coffee
imported into the US. The increasing US dollar, the recovery in the US economy, and increasing disposable income
will help to increasing consumption.
Coffee Shops
While coffee is a widely consumed beverage, coffee shops have very different clientele depending on the company.
For example, the Starbucks customer is ―upper-middle class, usually white and college-educated. Starbucks created
an affluent and vibrant café society in upper-middle-class suburbs, high-income city neighborhoods and prestigious
college campuses.‖ Dunkin‘ Donuts, by comparison, tells a very different story. The top classifications there ―are
working class, which aligns with the company image of appealing to the ―every day man‖ and that it is not elitist and
snobbish.‖ There are also some main characteristics of coffee shops.



Over 20,000 stores worldwide, with Starbucks owning more than half the storefronts.
In terms of coffee drinkers, Starbucks is estimated to own 47% of the market with revenue of $10.4 billion
in 2008.
Market share is highly concentrated – top thirty companies control more than 70% of the market.
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
Market is diversifying as major players add other options to their menus and new entrants like McDonalds
redefine the market boundaries
Current Situations
Currently, Starbucks has met unprecedented problems arising from both the company‘s overexpansion and the
economy‘s weakness under prior management. Taking a glance at Starbucks‘ recent financial reports, the companyoperated retail revenues growth was consistently growing at more than 20 percentages, however, dropped to only 10
percentages in 2008. Most recently, the retail revenues growth has slumped to -7.5 percentages the first quarter of
2009 fiscal year to the corresponding quarter of 2008.
Starbucks just announced that it would close another 300 stores in 2009 and total 600 in two years, 70 percent of
the stores to be closed were opened after the start of 2006. Starbucks‘ failure to meet market expectations is likely
going forward, particularly with respect to comparable store sales, net revenues, operating margins, and earnings per
share, will likely result in a decline in the market price of Starbucks stock.
In January of fiscal 2008, Starbucks began a transformation plan designed to address the deterioration of its US
retail business, reduce its global infrastructure costs and position the Company‘s business for long-term profitable
growth. Since the announcement, a number of actions have been initiated, resulting in the recognition of certain
exit, impairment and severance costs. The total amount of these restructuring costs recognized in fiscal 2008 was
$266.9 million. Certain additional costs from these actions are expected to be recognized in fiscal 2009, nearly all
related to US store closures. (10-k)
In addition, due to the difficult economy, customers started to cut the budget, especially the budget for luxury and
coffee is one of them. Customers who used to have Starbucks coffee started to buy cheaper coffee or reduce the
frequency of consuming. In the coffee industry, entrance barrier is low and buyer power is strong. Once those
potential competitors provide better coffee than they used to provide and charge less, they would lure customers
easily and quickly. Those make Starbucks hard to compete with potential competitors in nowadays. There is
probably hard to improve this problem so far and that is the main reason that Starbucks‘ 2008 revenue shrank.
Trends
To meet the competition and track customer needs, companies are expanding gourmet coffee beverage platforms to
another level. Espresso-based coffee drinks such as lattees and mochas have seen the greatest growth during the
past two years, yet iced coffee, tea—both iced and hot—as well as soda have also had impressive growth.
There is an increasingly evident that a strong food platform is essential as a complement to beverage offerings in
coffee house. Food platforms are a key complement to beverages and breakfast sandwiches, muffins, and scones are
seeing the biggest growth on menus.
There is widespread concern about the ‗Green‘ activities, which are undertaking a variety of friendly and responsible
initiatives to the communities in the coffee industry.
New Products & Advertisement
McDonald's is spending tens of millions of dollars advertising its coffee, apparently in an attempt to teach
customers how to pronounce its McCafe~ and also drink their new products. In addition, Wendy's has announced
that they will be improving the flavor and quality of their coffee in the near future. The fast-food chain plans to
7
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launch the new product, to be marketed as Wendy's Custom Bean, along with their new breakfast menu to make
Wendy‘s "a destination for coffee". All these initiatives will make this
industry more rivalry.
Starbucks is striking back to these competitors by campaign emphasizing its
premium quality. See more details in the recent news and photo.
In order to boost sales and profits, Starbucks added a new product
Starbucks VIA Ready Brew, instant brewed coffee and served up at one dollar each cup, into its portfolio in 2009.
Although CEO of Starbucks Howard Schultz considered VIA would be ―a transformational event in the history of
the company‖, there is some worries about VIA initiatives is just a one-off thing generate revenue in the short term
to meet the expectations of investors and may hurt brand value.
S.W.O.T. ANALYSIS
Strengths





Excellent brand name with international recognition
Established network of stores created the modern vision of the coffee ―experience‖
Loyal and generally satisfied clientele (77 on ACSI in 2008)63
Howard Schultz, founder and once-again CEO, ready for change
Highly competent product innovation team
Weaknesses





Key revenue generator (espresso drinks) easily imitable
Oversaturation of stores in certain markets created a customer service and financial mess
Perceived as corporate, which is antithetical to much of coffee shop culture
Large organization could be hard to change
Perceived as too expensive
Opportunities





Coffee shops have become a socio-cultural icon
Environmental awareness has become the norm for the industry
Difficult economy provides incentive for improved efficiencies64
Homogenous offerings at most competing coffee shops provides opportunity to innovate an advantage
Multiple competitors are creating a more savvy coffee shop consumer
Threats



Weakening economy particularly hurts ―luxury items‖ like Starbucks
Smaller chains can adapt to change faster to changing industry
McDonalds is a new kind of competitor that could seriously dent Starbucks market share
8
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

Slowing economy could permanently change consumer behavior regarding premium coffee
Coffee shops could be the next social fad to die (e.g. soda fountains and drive-in movie theaters)
PORTER’S 5 FORCES ANALYSIS
This is a highly competitive industry, and perhaps not a very attractive one to consider entering. But for established
companies that have brand awareness and established distribution, it is a relatively stable competitive landscape – as
long as the rivals can be held at bay.
Supplier Power Low/Modest
The suppliers are the manufacturers and producers of coffee beans. Large buyers can bargain suppliers for the best
prices and force suppliers to be dependent on their business. But, with coffee beans as a commodity, specifically,
Arabica bean which are, the most important beans in specialty coffees, suppliers have a degree of power and control
of their product environment. Not all suppliers offer the uniqueness and quality found in Arabica beans which is a
differentiator among other producers and increases supplying power.
Barriers to Entry Low/Modest
Anybody can easily offer a hot cup of coffee, but on the premium side of coffee the threat of potential entrants is
low to moderate. Switching costs (i.e., leasing of property, construction of roasting plants, specialized equipment)
and access to distribution channels serve as major barriers. Granted, the market is saturated with big brand
coffeehouses, but further entry is limited. On a smaller scale, new entrants on the local coffeehouse side are always a
likely story and will pose a minor threat to single Starbucks‘ locations and quality in any given vicinity.
Buyer Power Modest/Increasing
These days, it seems that anybody can offer a good cup of coffee for a reasonable price. If there is not a Starbucks
in every corner, there is another coffee shop. But, that is not the say the market is yet fully saturated. Bruce Milletto,
president of Bellisimo Coffee InfoGroup in Portland, Oregon said, ―Even now, we‘re so far from saturation that it
isn‘t even funny.‖ Before this industry hits that stage, mom and pop shops and coffee chains lead the market and a
leisurely approach to offering a hot cup of joy. Most of these establishments can offer premium quality coffee at
similar prices within an inviting café environment. Starbucks is a social icon itself and even touts a pop-culture
image. Its popularity on the social scene alone will only continue to perpetuate the premium coffee trend.
Consumers are the buyers in this scenario. With the strength of a social culture and trendy image created around the
company‘s coffee and coffeehouse environment, it is the consumers that are responsible for a coffee shop‘s success.
It is the consumers who will determine indefinitely whether or not a brand is still ―in‖ or if it is no longer the trend.
And it is the consumers who will drive down prices. Granted, these buyers are individuals, but collectively, have an
impact on the price of a cup of coffee. Their switching costs are non-existent which increases their buying power.
For all of these reasons, maintaining a strong understanding of customers is the key for success in this industry.
Threat of Substitutes High/Increasing
Drinking coffee is addictive, but not necessary to live. Cheap coffee has shown improvement and the current
economic situation could cause premium coffee to be substituted with cheaper, comparable alternatives. Other
caffeinated beverages, such as soda pop and energy drinks are much cheaper and easily accessible. Basic coffee
9
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would also be considered a viable substitute and could include home-brewed coffee and coffee purchased through
several outfits such as convenience stores, grocery stores, donut shops, bakeries, vending machines and fast food
establishments. Again, customer‘s consumption way will intrigue more alternatives to take place of coffee, such as
tea and decaffeinated coffee. Coffeehouse may provide more diversified products to customers.
Degree of Rivalry High/Incresing
There are two main categories of competitors in the international coffee shop industry. The first consists of other
premium coffee chains and small ―mom and pop‖ coffee shops. These shops focus on the high-quality coffee shop
experience and on providing the best coffee possible. Examples include neighborhood cafes, Peet‘s Coffee, Tully‘s
Coffee, and Caribou Coffee. The second category focuses more on convenience more experience. This group
consists primarily of fast food establishments such as Mc Donald‘s or donut shops such as Dunkin‘ Donuts and
Krispy Kreme. Also of consideration are basic, home-brewed coffee manufacturers of note, which include Folgers,
Proctor & Gamble and Maxwell House.
Competition among rivals in this industry is high and differentiation has become difficult as companies learn from
each other and as customers become more savvy. For a company to win a large portion of market share, it needs to
strategize to appeal to a wide demographic by delivering strongly on experience, convenience, and price.
CATALYSTS
Upside
 Improve customer service
 Expand Starbucks demographic and geographic appeal
 Segment market and create different offerings for different segments
 Diversify business and offerings as a hedge against shifting trends
Downside
 Increased Competition
 Global economy downturn lasting long period
 Customer perception or preference change
 Cost increasing
COMPARABLES ANALYSIS
Competitors of Starbucks
Delineating the boundaries of Starbucks‘ industry is somewhat challenging, since it can be argued that Starbucks
could be defined the industry for Starbucks in different ways, however, I consider Starbucks be part of the
international coffee shop industry. Major competitors include limited-service restaurants such as Dunkin‘ Donuts,
Krispy Kreme or McDonalds, smaller coffee shop chains such as Caribou Coffee, international coffee house Tim
Hortons, and local independent coffee shops. (The other option for industry definition, the coffee roasting and
distributing industry, is where Starbucks began in the 1970s and where they may be expanding into again in the
future.) Therefore, I choose four main companies in my comparable analysis.
Caribou Coffee Company, Inc. (30%) operates gourmet coffeehouses. It offers
gourmet coffee and espresso-based beverages, as well as specialty teas, baked goods,
whole bean coffee, branded merchandise, and related products. As of December 28,
2008, the company had 511 coffeehouses, including 97 franchised coffeehouses
10
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located in USA and international markets. It also sells gourmet whole bean and ground coffee to grocery stores,
mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses,
and online customers. The company was founded in 1992 and is headquartered in Minneapolis, Minnesota. Caribou
Coffee Company, Inc. is a subsidiary of Caribou Holding Company Limited. (Yahoo! Finance)
Tim Hortons Inc.(30%) engages in the development and franchising of quickservice restaurants in the United States and Canada. It primarily offers premium
coffee, flavored cappuccinos, specialty teas, home-style soups, sandwiches, baked
goods, and donuts. As of December 28, 2008, Tim Hortons Inc. and its
franchisees operated 2,917 restaurants in Canada and 520 restaurants in the United
States under the brand name ‗Tim Hortons‘. The company was founded in 1964
and is based in Oakville, Canada. Tim Hortons Inc. operates independently of Wendy's International Inc. as of
September 29, 2006. (Yahoo! Finance)
Independent coffeehouses or small chain coffeehouses
They are the main competitors for Starbucks, almost providing the same food and beverage with what Starbucks
provides, yet price is lower to Starbucks. The only difference might be just brand image. However, customers might
not care brand name. They just want good coffee and those coffeehouses can take advantage of it because of
location and reputation. Most of people buy coffee in the neighborhood of their house or office. Thus, those
independent or small chain coffeehouses might be close with customers and well-known by neighborhoods. Oncampus coffeehouses and Dutch Bros are good examples.
Donut Shops
Donut shops serve donuts, other baked goods, and coffee. The revenue which comes from coffee is important for
donut shops. Around 40% of customers visit donut shops because they think the coffee is good. 10% of customers
who had breakfast in last past week went donut shops and the same percentage for coffeehouses. The players of
donut shops are Dunkin‘s Donuts, Krispy Kreme, Tim Hortons…etc. For Starbucks, Dunkin‘s Donuts is a main
competitor.
Krispy Kreme Doughnuts, Inc. (10%) operates as a branded retailer and
wholesaler of doughnuts and packaged sweets. It engages in owning and franchising
Krispy Kreme doughnut stores, which make, sell, and distribute approximately 20
varieties of doughnuts, including various packaged and unpackaged doughnuts, such
as hot Original Glazed doughnuts, as well as beverages, which include drip coffees,
espresso-based coffees, coffee-based and noncoffee-based frozen drinks, and
packaged and fountain beverages. As of February 1, 2009, it operated 523 Krispy Kreme stores in the United States
and globally. Krispy Kreme Doughnuts, Inc. was founded in 1937 and is headquartered in Winston-Salem, North
Carolina. (Yahoo! Finance)
Quick Service Restaurants
Starbucks face significant threat from quick service restaurants. Quick service restaurant serve normal meal and
beverage. They offer coffee too and generally cheaper than Starbucks. The income from coffee is not a big part for
them. However, since the high profit margin of coffee, quick service restaurants still put much energy to improve
the sales of coffee. For example, they try to serve more high quality coffee drinks. Quick service
restaurants would appeal price-conscious consumers, especially at the bad time. The represents
of quick service restaurant are McDonald‘s and Jack in the Box.
McDonald’s Corporation, (30%) together with its subsidiaries, franchises and operates
McDonald‘s restaurants in the food service industry worldwide. Its restaurants offer various
11
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food items, soft drinks, and coffee and other beverages. As of December 31, 2008, the company operated 31,967
restaurants in 118 countries, of which 25,465 were operated by franchisees; and 6,502 were operated by the
company. McDonald‘s Corporation was founded in 1948 and is based in Oak Brook, Illinois. (Yahoo! Finance) As
part of its multi-year strategy to take advantage of the significant and growing beverage category, McDonald‘s began
rolling-out espresso-based hot and cold specialty coffees. In 2009, it launched the new McCafe to the market, which
is big threat to Starbucks.
Convenience stores and gas stations
The income from coffee for convenience stores and gas stations does not account for substantial portion of their
revenue. However, they potentially take customer away. ―According to data from McMillan Doolittle LLP, the
typical profit margin on gasoline is 8%, compared with 30% to 35% for packaged products, such as cigarettes,
candy and soda, and 60% for foodservice products, such as fountain drinks, coffee, hot dogs and sandwiches. As
margins shrink due to the high price of gas, C-stores and gas stations will increasingly look to food and beverage
platforms to make up for it.‖ The players of conveniences stores and gas are 7-Eleven, New England Pantry
Inc….etc.
Coffee at home
Roasted coffee, instant coffee, coffee beans and ready-to-drink coffee are included. The customer base of the
players belong this group are not looking for high-quality coffee and price-sensitive. They are probably not the main
competitors of Starbucks. However, when the economy is bad, part of Starbucks customers might move to this
group. The represents are Kraft and Nescafé.
Breakfast Restaurants
Coffee for breakfast restaurants is like ice water or orange juice. The reason they offer coffee is just because
customer would like to have coffee with their breakfast. Usually there is only regular hot coffee, no other coffee
drinks, such as latte and cappucino. The coffee in breakfast restaurants is low-end. It‘s acceptable for customers.
They go breakfast restaurant for good food, not good coffee. Besides, coffee is not profitable for breakfast
restaurants. However, these restaurants still are kind of Starbucks‘ competitors. Since Starbucks serves breakfast
food too although it‘s much simpler than the food served at breakfast restaurants. Customers might not go to
Starbucks after they have breakfast at these restaurants. The main players are IHOP, Denny‘s, diners…etc.
I decided to use the equally weighted metrics of EV/Revenues, EV/EBITDA, EV/Gross Profit, and EV/OCF.
DISCOUNTED CASH FLOW ANALYSIS
Revenues
Regarding 10-K for fiscal year 2008, Starbucks‘ transforming plan initiated in July 2008 will have a significant impact
on Starbucks‘ future sales. The company announced a multi-faceted plan to transform its business and improve
results of operations, including a plan to close approximately 600 underperforming Company-operated stores in the
US market, a restructuring of the Australia market, and certain leadership and non-store organization changes.
Taking this initiative and external business environment into consideration, Starbucks‘ future sales forecasting are
projected under these following factors.
Factor 1: Number of Net Stores Opened or Closed
In terms of Starbucks‘ revenue components, around 85% of Starbucks‘ sales revenues are generated from companyoperated retail stores and the other 15% are from specialty operations including licensing and food services,
therefore; the number of net stores opened or closed, which has major impact on sales revenue, as one factor for
sales forecast.
12
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Starbucks fiscal 2009 US store opening target is approximately a negative 20 net new stores, which includes a nearly
225 Company-operated store decline and approximately 205 net new licensed stores. Internationally, Starbucks is
planning to open approximately 700 net new stores in fiscal 2009, two-thirds of which are expected to be licensed,
as it factors in the current global economic climate, with a more cautious approach in the UK and Western Europe.

Past sales performance –summarized the total Company-operated retail store historical data from 2005 to 2008
as follows:
United States
Domestic Growth Rate
Net New Stores Opened Within One Fiscal Year
2008
2007
2006
2009
445
1065
810
-20
-58%
31%
40%
-104%
International
International Growth
Rate
500
236
277
233
146
112%
-15%
19%
60%
22%
In all
Total Growth Rate
480
-30%
681
-49%
1342
29%
1043
44%
726
15%
Net revenues
Total net revenues
% of Growth

2005
580
13%
2008
10383
10%
2007
9411.5
21%
2006
7786.9
22%
2005
6369.3
20%
Sales growth looking forward – For 2009, the numbers of new stores opened are based on Starbucks‘
management discussion from 2008 10-K. Starbucks fiscal 2009 US store opening target is approximately a
negative 20 net new stores, which includes a nearly 225 Company-operated store decline and approximately 205
net new licensed stores. Internationally, Starbucks is planning to open approximately 700 net new stores in
fiscal 2009, two-thirds of which are expected to be licensed, as it factors in the current global economic climate,
with a more cautious approach in the UK and Western Europe. Further, for 2010 to 2013 it is expected
Starbucks continues to open net new stores worldwide at a rate that is higher than its industry average level.
Factor 2: Different Operating Segments
I correlated the predicted growth rate in number of net stores opened or closed above to sales growth in dollar
amount by considering Starbucks‘ three reportable operating segments- United States, International, and Global
Consumer Products Group (CPG). Summarized historical net revenues in manner of percentage in worldwide sales
and yearly growth rate from 2005 to 2008 as follows:
13
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Net Revenues Within One Fiscal Year
2009
2008
2007
2006
6467.34 7887.00
7349.00 6178.50
2005
5097.50
72.00%
75.96%
78.09%
79.34%
80.03%
-18.00%
7.32%
18.94%
21.21%
International
Percentage in Worldwide
Sales
International Growth Rate
2839.59
2103.40
1696.00
1302.90
1022.49
24.00%
20.26%
18.02%
16.73%
16.05%
35.00%
24.02%
30.17%
27.42%
Global CPG
Percentage in Worldwide
Sales
GCPG Growth Rate
420.00
392.60
366.30
305.50
249.29
4.00%
3.78%
3.89%
3.92%
3.91%
6.98%
7.18%
19.90%
22.55%
In All
Total Growth Rate
9726.93
-6.32%
10383.00
10.32%
9411.30
20.86%
7786.90
22.26%
United States
Percentage in Worldwide
Sales
Domestic Growth Rate
6369.28

Percentage in worldwide sales – For 2009, due to a significant expected drop in the number of net new stores
opened in the domestic market and the Company‘s focus to the international market, I predicted a lower
percentage revenues generated from the United State of 72% of that from worldwide whereas a higher
percentage international revenues of 24%. The rest of 4% is for the Global CPG.

Annual growth rate – Based on Starbucks‘ operational results for the 13 weeks and 26 weeks ended March 29,
2009 from the Company‘s 10-Q 2009, the percentage changes in the total net revenues are negative 7.6% and
negative 6.5%, respectively; therefore, with the continuous impact from current economic downtime, I
predicted the total annual growth rate in fiscal 2009 to be around negative 6%. With emphasis on the
international market of almost 9% (35%-24.2%) higher and modest growth in Global CPG of 6.98%, I backed
up domestic growth rate of negative -18% for 2009.

Sales growth looking forward beyond 2009 – The major obstacle faced in conducting a valuation of Starbucks
is that none of the available data represents the company in a steady state. 2008 was an unusually bad year for
Starbucks. In the previous three years Starbucks experienced a 20% compounded growth rate of sales which is
not sustainable. I believe that after closing unprofitable stores in 2009, Starbucks will continue to grow at a rate
that is greater than GDP beyond our forecasting horizon in the following year. In the next five years, Starbucks
will back to close historical growth due to market saturation and competition. Then, the terminal growth rate is
slightly higher than the GDP.
Expenses Forecast
As discussed in the Management Overview section of Starbucks‘ 2008 10-K, many of the Company‘s operating
expenses are fixed in nature while the management expected the costs to be increased during economic downturn
due to low customer traffic and restructuring costs for stores closure. This implies that when stores are operating
14
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University of Oregon investment group
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efficiently, costs as percentage of sales should be consistent over time even as the company grows. By closing
unprofitable stores, management is attempting to return to the ratios and margins of prior profitable years. This is
further supported by the following statement in the MD&A describing a plan for, ―…reducing approximately 1,000
open and filled positions within the Company‘s leadership structure and its non-store organization, to rationalize its
infrastructure for the reduced number of stores…‖ Therefore I chose to forecast a return to the margins and
percentage of sales numbers that were consistent during years 2005-2007 after year 2008 and year 2009.
Costs of sold
The Company buys coffee using fixed-price and price-to-be-fixed purchase commitments, depending on market
conditions, to secure an adequate supply of quality green coffee. Building on its ongoing global coffee sustainability
commitment to coffee farms and cooperatives throughout the world, Starbucks establishes long-term relationship
with coffee farmers and their communities and take the social responsibility. In that way, the cost will not be
dramatically fluctuating in the future. In addition, as a result of the stores closing and contract, company will pay
off the occupancy cost leading the high level percentage in 2009. In the rest of future years, cost of sold will
increasing to the historical level.
General and administrative expense
This category of expense is expected to be decrease in 2009 due to lower payroll-related expense resulted from
Starbucks‘ layoff policy and to be gradually back to historical normal average of 7% of sales in the future.
Restructuring costs
In January of fiscal 2008, Starbucks began a transformation plan designed to address the deterioration of its US
retail business, reduce its global infrastructure costs and position the Company‘s business for long-term profitable
growth. Since the announcement, a number of actions have been initiated, resulting in the recognition of certain exit,
impairment and severance costs. The total amount of these restructuring costs recognized in fiscal 2008 was $266.9
million. Certain additional costs from these actions are expected to be recognized in fiscal 2009, nearly all related to
US store closures. (10-K) I also took this into factor into the cost during 2009 which makes it slightly higher than
normalyears.

Based on the 10-Q, company has closed about 500 stores in 2008 and 150 stores in the first half year 2009 across
the world. The latter closing stores results in higher restructuring costs. I projected the restructuring cost is going to
replicate the same cost of first half year 2009 even there is few stores are planned to close.
Depreciation and amortization expense
I projected depreciation expenses to relatively consistent in year 2009 primarily due to negative net stored opened
across the world. In the future, it is reasonable to forecast depreciation and amortization at around to historical
normal average level at 5% of sales.
Interest expense
The past rate at which a firm has borrowed is a good indicator of its future borrowing rate, unless there is another
dramatic change in either the firm‘s default risk or macro-level interest rate. Therefore, I predict the interest rate will
be relatively consistent at around 0.5% of the recent year‘s level.
15
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University of Oregon investment group
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Tax Rate
Company‘s effective tax rate is decreasing in recent years due to its shift to international markets. Management
states that they plan to reinvest all foreign earnings in the foreseeable future rather than repatriate those earnings
which would otherwise be subject to higher U.S. tax rates. Because foreign earnings will not be repatriated in the
future, I chose to forecast a constant marginal tax rate of 33% for all future periods. I projected the tax rate should
trend lower somewhere around previous lower boundaries.
Net Working Capital
Cash, accounting receivable and inventories are the largest account in the current assets, and short borrowing,
accounts payable and deferred revenue are the main accounts of the current liabilities. Based on the historical data,
current assets and current liabilities are relatively stable and the new working capital will be relatively consistently in
the future. The company is not going plan to any tremendous acquisitions in 2009 yet not generate large amount
revenues which has led to a consistent ratio to the current ratio in 2008.
Capital Expenditures/Acquisitions
Although acquisitions will not be nearly as significant in 2009 as they were before, the level of capital expenditures
and acquisitions in the future should remain at levels to previous historical ones. The company‘s capital
expenditures from 2005 to 2008 are consistent around 10%, reflecting to the company‘s primary growth strategy of
continuing opening stores and acquisitions of successful local stores. Therefore, I projected the percentage rate in
2009 is lower than normal year. As a result of these trends I also estimated cap ex and acquisitions as 8-9% of
revenues going forward due to the company‘s careful choosing locations.
Cost of Debt
To project cost of debt I took the weighted average interest rate on the company‘s long-term debt. This number
came out to 6.25% % which I feel is a reasonable estimate for the cost of debt.
Beta
When calculating my beta I ran a 5-year monthly regression against the S&P 500. The output resulted in a beta
coefficient of 1.26 with a standard error of 0.29 and a t-stat of 4.40.
Recommendation
Based on my DCF analysis I arrived at an undervaluation for The Starbucks Company of 8.47% and based on the
comparables an undervaluation of 72.36%. By weighting the DCF at 70% and the comparables at 30% I arrive at a
target price of $17.95 a total undervaluation of 27.64%. Starbucks is also the market leader. I give a
recommendation to Buy.
16
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University of Oregon investment group
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APPENDIX 1 – COMPARABLES ANALYSIS
Starbucks
Corporation
(SBUX)
Weight
in millions, except per share data and volume
Current Price
$
14.06
Price (52 weeks)
7.06-18.56
Shares Outstanding
735.50
Average Daily volume(3 months)
14,041,200
Beta
1.26
Market Cap
10,341
Enterprise Value
10,891
Annual Dividend Yield
N/A
Revenue(ttm)
10,383
Gross Profit(ttm)
5738
EBIT(ttm)
504
Operating Cash Flow(ttm)
1259
Net Working Capital
-442
Long Time Debt
550
Return on Average Assets(ttm)
6.14%
Return on Average Equity(ttm)
3.10%
Valuation Multiples
EV/Revenue
EV/Gross Profit
EV/EBIT
EV/OCF
McDonald's Corp.
(MCD)
20%
Krispy Kreme
Doughnuts Inc.
(KKD)
20%
Caribou Coffee
Company, Inc.
(CBOU)
30%
Tim Hortons Inc.
(THI)
30%
1.00
57.90
3.28
5.80
25.54
21.64
45.79-67.00
1.01-5.65
1.10-6.49
20.04-33.48
20.04-33.48
767.06
67.51
19.37
180.99
227.02
10,720,700
412,130
77,487
839,516
2,501,667
0.67
2.00
2.18
0.78
1.42
62,970
221
112
4,622
14,059
73,156
295
126
5,109
16,260
2.2% N/A
N/A
N/A
N/A
23,522
384
254
2,044
5,471
8,640
39
110
863
2,027
6,423
5
(15)
444
1,414
5917
17
7
356
1296
979
36
-4
99
232
10,186
73
13
486
2,202
12.53%
1.67%
0.25%
14.65%
0.07
27.44%
-7.10%
-19.52%
26.38%
6%
Multiple
Implied Value Weights
1.05
1.90
21.61
8.65
3.11
8.47
11.39
12.36
0.77
7.57
61.94
17.77
0.50
1.15
-8.13
17.91
2.50
5.92
11.52
14.35
1.67
5.33
11.47
15.70
22.89
40.81
7.11
26.13
Implied Price
$
Current Price
$
Undervalued
25%
25%
25%
25%
24.23
14.06
72.36%
17
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University of Oregon investment group
http://uoig.uoregon.edu
APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS
in millions
Net revenues
2005
Company-operated retail 5,392
% of Growth
20.97%
Specialty:
Licensing
673
% of Growth
18.95%
Foodservice and other 304
% of Growth
12.28%
Total specialty
977
% of Growth
16.79%
Total net revenues
6,369
% of Growth
20%
0.5
N/A
2006
2007
2008 2009Q1 2009Q2 2009Q3-4 2009
6,583
7,998
8,772
2,176 1,962
4283
8421
22.09% 21.50% 9.67% -7.45% -8.44%
-4%
1.5
2010
8842
5%
861
1,026
1,172
334
283
625
1,242
27.87% 19.25% 14.16% 9.68% 9.68%
6%
343
387
440
105
89
237
431
12.76% 12.73% 13.60% -5.93% -5.93%
-2%
1,204
1,413
1,611
439
372
862.11 1,673
23.17% 17.39% 14.00% 5.50% 5.50%
4%
7,787
9,412 10,383 2,615 2,333
5145
10094
22%
21%
10% -5.50% -5.50%
-2.79%
1,366
10%
439
2%
1,805
8%
10647
5.49%
2,605
% Of Revenue
40.90%
Gross Profit
3,764
% Of Revenue
59.10%
Operating Expense
Store operating expenses 2,166
% Of Revenue
34.01%
Other operating expenses 193
% Of Revenue
3.02%
Depre & amort expenses
340
% Of Revenue
5.34%
SGA
362
% Of Revenue
5.68%
Restructuring charges
% Of Revenue
Total operating expenses 3,060
% Of Revenue
48.05%
Income from equity investees 77
% Of Revenue
1.20%
Operating income
781
% Of Revenue
12.25%
Interest income and other, net16
% Of Revenue
0.25%
Interest expense
0
% Of Revenue
0.00%
Earnings before income taxes
796
% Of Revenue
12.50%
Income taxes
302
Tax Rate
37.92%
Net Income
494
% Of Revenue
7.76%
Add Back: Depr & Amor
340
Add Back: Int Exp*(1-Tax Rate) Cash Flow from Operations 835
% Of Revenue
13.10%
Current Assets
1209
% Of Revenue
18.99%
Current Liabilities
1227
% Of Revenue
19.26%
Net Working Capital
-18
% Of Revenue
-0.28%
Change in NWC
-18
Capital Expenditure
643
% Of Revenue
10.10%
Acquisition
21.6
% Of Revenue
0.34%
Free Cash Flow
831
PV of Free Cash Flow
3,179
3,999
4,645
1,197 1,044
40.82% 42.49% 44.74% 45.76% 44.72%
4,608
5,412
5,738 1,418 1,290
59.18% 57.51% 55.26% 54.24% 55.28%
COS (occupancy costs)
2,688
34.52%
254
3.26%
387
4.97%
479
6.16%
3,808
48.90%
94
1.21%
894
11.48%
21
0.27%
8
0.11%
906
11.64%
325
35.84%
582
7.47%
387
5
974
12.51%
1530
19.65%
1936
24.86%
-406
-5.21%
-388
772
9.91%
91.7
1.18%
1,271
3,216
34.17%
294
3.13%
467
4.96%
489
5.20%
4,467
47.46%
108
1.15%
1,054
11.20%
40
0.43%
38
0.40%
1,056
11.22%
384
36.32%
673
7.15%
467
24
1,164
12.37%
1697
18.03%
2156
22.90%
-459
-4.88%
-53
1080
11.48%
53.3
0.57%
1,164
3,745
36.07%
330
3.18%
549
5.29%
456
4.39%
267
2.57%
5,347
51.50%
114
1.09%
504
4.85%
9
0.09%
53
0.51%
460
4.43%
144
31.34%
316
3.04%
549
37
901
8.68%
1748
16.84%
2189.7
21.09%
-441.7
-4.25%
17
985
9.48%
74.2
0.71%
810
937
35.81%
73
2.78%
134
5.14%
105
4.02%
76
2.89%
1,324
50.63%
24
0.90%
118
4.50%
-6
-0.24%
13
0.50%
98
3.76%
34
34.59%
64
2.46%
134
9
207
7.92%
1693.9
64.77%
1953
74.68%
-259.1
-9.91%
183
820
35.13%
64
2.74%
134
5.75%
104
4.47%
152
6.52%
1,274
54.61%
25
1.08%
41
1.75%
3
0.12%
9
0.38%
35
1.50%
10
28.37%
25
1.07%
134
6
165
7.09%
1604
68.75%
1686
72.25%
-82
-3.51%
177
25
-12
SUM
2.5
2011
9549
8%
3.5
2012
10982
15%
4.5
2013
12959
18%
5.5
2014
15291
18%
6.5
2015
18044
18%
7.5
2016
20750
15%
1,571
1,807
2,168
2,645
3,174
3,555
15%
15%
20%
22%
20%
12%
483
544
614
697
791
898
10%
12.5% 13.0% 13.5% 13.5% 13.5%
2,054
2,350
2,782
3,342
3,965
4,453
14%
14%
18%
20%
19%
12%
11604 13332 15741 18633
22009
25203
8.98% 14.90% 18.07% 18.38% 18.12% 14.51%
8.5
2017
22410
8%
9.5
2018
23306
4%
3,839
8%
988
10.0%
4,827
8%
27237
8.07%
3,993
4%
1028
4.0%
5,020
4%
28327
4.00%
2201
4441
4578
4990
5733
6769
7826
9244
10585
11440
11897
44.00% 43.00% 43.00% 43.00% 43.00% 42.00% 42.00% 42.00% 42.00% 42.00%
2,944
5,652
6,069
6,614
7,599
8,972 10,807 12,765 14,618 15,798 16,430
56.00% 57.00% 57.00% 57.00% 57.00% 58.00% 58.00% 58.00% 58.00% 58.00%
1827
3583
35.51% 35.5%
166
303
3.23% 3.0%
297
565
5.77% 5.6%
194
404
3.78% 4.0%
277
505
5.39% 5.0%
2761
5360
53.67% 53.1%
52
101
0.01
1.0%
235
394
3.9%
0
0
0
0.0%
29
50
0.5%
210
343
3.40%
40
106
31%
170
237
3.30% 2.35%
297
565
29
35
495
837
9.63% 8.29%
1604
1715.9
17.00%
1936.3 2170.1
21.50%
-332
-454
-4.00%
-13
303
303
3.0%
192
182
4042
547
3780
35.5%
319
3.0%
596
5.6%
426
4.0%
0
0.0%
5121
48.1%
106
1.0%
1054
9.9%
0
0.0%
53
0.5%
1001
9.40%
330
33%
671
6.30%
596
36
1,303
12.23%
1810.1
17.00%
2289.2
21.50%
-479
-4.30%
-25
639
6.0%
4061
35.0%
348
3.0%
650
5.6%
580
5.0%
0
0.0%
5639
48.6%
116
1.0%
1091
9.4%
0
0.0%
58
0.5%
1033
8.90%
341
33%
692
5.96%
650
39
1,381
11.90%
2088.7
18.00%
2494.8
21.50%
-406
-4.50%
73
986
8.5%
4666
35.0%
400
3.0%
747
5.6%
667
5.0%
0
0%
6479
49%
133
1.0%
1253
9%
0
0%
67
0.5%
1187
8.90%
392
33%
795
5.96%
747
45
1,586
11.90%
2399.8
18.00%
2866.4
21.50%
-467
-5.00%
-60
1200
9.0%
5431
34.5%
472
3.0%
881
5.6%
787
5.0%
0
0%
7571
48%
157
1.0%
1558
10%
0
0%
79
0.5%
1480
9.40%
488
33%
991
6.30%
881
53
1,926
12.23%
2833.4
18.00%
3384.3
21.50%
-551
-5.00%
-84
1417
9.0%
6429
34.5%
559
3.0%
1043
5.6%
932
5.0%
0
0%
8963
48%
186
1.0%
2031
11%
0
0%
93
0.5%
1938
10.40%
639
33%
1,298
6.97%
1,043
62
2,404
12.90%
3447.17
18.50%
4006.17
21.50%
-559
-5.30%
-8
1677
9.0%
7593
34.5%
660
3.0%
1232
5.6%
1100
5.0%
0
0%
10586
48%
220
1.0%
2399
11%
0
0%
110
0.5%
2289
10.40%
755
33%
1,534
6.97%
1,232
74
2,840
12.90%
4181.69
19.00%
4621.86
21.00%
-440
-5.30%
119
1981
9.0%
8695
34.5%
756
3.0%
1411
5.6%
1260
5.0%
0
0%
12123
48%
252
1.0%
2747
11%
0
0%
126
0.5%
2621
10.40%
865
33%
1,756
6.97%
1,411
84
3,252
12.90%
4788.59
19.00%
5292.65
21.00%
-504
-5.30%
-64
2142
9%
9397
34.5%
817
3.0%
1525
5.6%
1362
5.0%
0
0%
13101
48%
272
1%
2969
11%
0
0%
136
0.5%
2833
10.40%
935
33%
1,898
6.97%
1,525
91
3,514
12.90%
5175.09
19.00%
5719.84
21.00%
-545
-5.30%
-41
2179
8%
9773
34.5%
850
3.0%
1586
5.6%
1416
5.0%
0
0%
13625
48%
283
1%
3088
11%
0
0%
142
0.5%
2946
10.40%
972
33%
1,974
6.97%
1,586
95
3,655
12.90%
5382.1
19.00%
5948.63
21.00%
-567
-5.30%
-22
1983
7%
689
582
321
243
447
302
593
358
735
397
740
357
1,174
506
1,376
531
1,694
584
18
Starbucks Corporation
University of Oregon investment group
http://uoig.uoregon.edu
APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
Tax Rate
Risk Free Rate (10 Year Bond)
Market Risk Premium
Beta
Cost of Equity (CAPM)
% Equity
Cost of Debt
% Debt
WACC
33.00%
3.45%
7.00%
1.26
12.27%
94.95%
6.25%
5.05%
11.86%
Terminal Growth Rate
Net Present Value of FCFs
Terminal Value
PV of Terminal Value
Firm Value
Long Term Debt
Equity Value
Shares Outstanding
Implied Share Price
Current Share Price (06/15/2009)
Undervalued
DCF Weighting
Comparables Weighting
Target Price
Undervalued
4.00%
$4,041.84
$22,407.18
$7,725.00
$11,766.84
$549.60
$11,217.24
735.50
$15.25
$14.06
8.47%
70.00%
30.00%
$17.95
27.64%
APPENDIX 4 – BETA SENSITIVITY ANALYSIS
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.50050123
0.250501481
0.237579093
0.098304248
60
ANOVA
df
Regression
Residual
Total
SS
1
58
59
Coefficients
Intercept
X Variable 1
-0.008277464
1.262450819
0.18733205
0.560496062
0.747828112
Standard Error
MS
F
0.18733205 19.38507624
0.009663725
t Stat
P-value
0.012710433 -0.651233879 0.517467546
0.286735003 4.402848651 4.65355E-05
Significance F
4.65355E-05
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
-0.033720159 0.017165231 -0.033720159 0.017165231
0.688488356 1.836413282 0.688488356 1.836413282
19
Starbucks Corporation
University of Oregon investment group
http://uoig.uoregon.edu
Beta (β)
1.83
1.69
1.55
1.40
1.26
1.12
0.97
0.83
0.69
Standard Deviation
2σ
1.5σ
1σ
0.5σ
--0.5σ
-1σ
-1.5σ
-2σ
Implied Price
$9.89
$10.81
$11.95
$13.39
$15.25
$15.77
$16.70
$17.71
$18.82
Under (Over) Valued
-82.79%
-81.20%
-79.22%
-76.71%
8.47%
-72.56%
-70.95%
-69.19%
-67.27%
CAPM
WACC
PV Terminal
Equity Value
16.28%
15.28%
14.28%
13.27%
12.27%
11.27%
10.26%
9.26%
8.26%
15.67%
14.72%
13.77%
12.82%
11.86%
10.91%
9.96%
9.00%
8.05%
3,784.25
4,457.50
5,295.81
6,356.46
7,725.00
8,109.85
8,790.44
9,534.72
10,349.27
7,276.49
7,949.74
8,788.04
9,848.70
11,217.24
11,602.09
12,282.68
13,026.96
13,841.51
APPENDIX 5 – SOURCES










10-K, 10-Q‘s of The Starbucks Company and various competitors
IBISWorld Database
S&P NetAdvantage
Yahoo! Finance
Google Finance
Bloomberg.com
Reuters.com
Mintel
FactSet
The National Coffee Association of U.S.A.,
20