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THE COFFEE MARKET &
STARBUCKS
FINANCIAL ANALYSIS
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Table of Contents
Executive Summary
Recent Capital Markets Activity
Coff
ee Industry Overview
Company Considerations
Share price performance
Recent Corporate Actions
Operating Performance
Valuation
Trade Idea
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EXECUTIVE SUMMARY
This presentation evaluates the consumer services industry in which Starbucks (SBUX)operates.
In this analysis, I have identified the fundamental drivers of the coffee industry andcompany; to evaluate the intrinsic price of SBUXs shares using a fully integrated financialstatements forecast model and discounted cash flow valuation.
I have observed the following key valuation drivers with respect to the companys operatingperformance and documented assumptions for SBUX growth:
Growth of revenues in traditional markets and existing stores: Americas unit growth is likely
to rise. SBUX is increasing its performance in the US by designing all of its bakery, lunch andevening initiatives to optimize revenues throughout the day.
SBUX expanding to new markets: China retail opportunity is very attractive. Year-1 cash-on-cash
returns of 67% are almost double the U.S. in its nascent stage, with portfolio returns >100%.With a total unit opportunity of 12K in China, a sustained runway of annual 30%+ co-owned
unit growth is expected. Innovations: SBUX is expanding its product offering beyond ready-to-drink-coffee through
beverage innovations and new acquisitions (Teavana, La Boulange). The new mobile app
platform is also a key contributor to current and ongoing comp momentum.
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CAPITAL MARKETS
OVERVIEW
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Investor Sentiment Quotes
The recent unprecedented weather has affected both the 2014-15 and the
2015-16 crops () even under the most optimistic scenario, we expect asecond consecutive coffee market deficit. (Volcafe Ltd)
Foolish investors should strongly consider initiating positions in Starbucksright now, because I believe its long-term potential is far greater than that ofany other company in the industry (Joseph Solitro former financial analyst
at Capital Guardian LLC)
Starbucks is quickly making an impact in grocery stores with the sale ofpackaged coffee, Starbucks Refreshers, and even Oprah-branded Chai Tea.These initiatives, combined with the ongoing changes to Starbucks' menuofferings, outline a diverse set of growth drivers that leave little reason to
doubt that Starbucks will continue to drive earnings-per-share growth of15%. (Brian Shaw, former financial analyst at Atlantic Financial)
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Investor Sentiment Quotes
It used to be possible to be a global brand by dominating the US market.
Thats changing rapidly. Now you have to be number one in Asia. (MelanieMcShane, strategist at WolffOlins)
The opportunity is absolutely in India and China, but Ive seen opportunitiesall over the world. (Troy Alstead, Starbucks chief financial officer)
India is a very slow market, and unlike China Starbucks probably understandthat here it will take a lot of time. (Pinakiranjan Mishra, head of retail and
consumer goods for India at Ernst & Young)
Starbucks is a symbolic representative of unrefined food culture. (RuiChenggang, presenter at CCTV)
Starbucks stock is still reasonable in light of the powerful global brand,growth opportunities and innovation. In other words, the pros outweigh thecons on the stock. (Tom Taulli, InvestorPlace Writer)
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COFFEE INDUSTRY
OVERVIEW
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Co ee Industry Overview
(consumption and production)
Steady growth in world production,interspersed with periodic falls
Expansion of niche value markets int r ad i t iona l c ons uming c ount r i e s /Considerable potential in exportingcountries (although per capita consumptionlevels are still low)/ Growing demand fromemerging markets
Rise in costs of coffee production inputs,particularly fertilizers and labour
World co ee production by region
Production costs in exporting countriesorld co ee consumption by market
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Brazilian drought will affect both the2014-15 and 2015-16 crop seasons
Production has a much weakerinfluence on price than availability orstocks
Starbucks bias to hedge its coffeeexposure 12-18 months into the future
means the company should benefitfrom favourable input prices
Seasonal Surplus/ Deficit
Supply and demand ratioso ee price forecasts
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1965-1989 1990-2012
Global Availability/Consumption
1.81 1.50
World Production/Consumption
1.02 1.00
World Stocks/Consumption
0.80 0.50
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Competitive Landscape US Restaurant
Brands
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COMPANY
CONSIDERATIONS
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Key Company Considerations
Starbucks grew revenues in 2013 thanks to growth in comparable-store sales,
openings of 853 new stores and a series of new initiatives.
SBUX increased its performance in existing stores and in the US by designing allof its bakery, lunch and evening initiatives (wine, beer, and shareable smallplates) to optimise revenues throughout the day.
The company is expanding in new markets: in particular China, India and Korea.
The acquisitions of Teavana and Evolution Fresh expanded Starbucks offeringbeyond ready-to-drink coffee, giving tea (cf. Oprah-branded Chai Tea) and juiceoptions to customers. Benchmark product quality and price also increased withits new range of La Boulange products.
The company updated its mobile app platform, enabling customers to pull uptheir card by shaking their mobile device and transmit discretionary tips to
servers via smartphone.
The company sits on solid fundamentals. A one-time litigation charge resulted innegative free cash flow of $1.7 billion; however, minus this charge, growth in freecash flow would have increased y-o-y.
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Share Price Performance vs
Competitors (Last 12 Months)
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Starbucks Financial Forecasts
EBIT & Margin (14-18)
Profit & Margin (14-18)ales & Growth (14-18)
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The opening of new stores, diversification of
products on sale, the amelioration of marginsand the average augmentation of products
quality and prices explain the global revenuesgrowth
Movements in coffee prices imply Starbucks
could realize $350 million+ in cost savings inFY14 and FY15
Channel Development (Teavana, La Boulange) isa high-margin wild care for growth.
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Key Financial Metrics - Gearing
Starbucks Corp.'s debt-to-equity ratiodeteriorated significantly from 2012 to
2013, since the company paid $2.76 billionin litigation charges to settle a dispute
with Kraft over coffee distribution.
This cyclical cash deficit was unique and
Starbucks should pay down long-termdebt outstanding during FY14.
Given Starbucks robust gearing position,there is significant debt capacity to
reduce cost of capital or deploy throughfurther acquisitions
Net Debt / EBITDA
Net Debt / (Cash)
-1276
1288 1343 14731735
2192
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Headline Operational Metrics
The Americas represent the most important
operating region with 74% of total sales. In Europe margins were negative due to:
Higher occupancy costs
Less productive stores
Economic uncertainty.
China is now a core market for Starbucks. In
2013, it was a record year for the region, wherethey opened 317 stores - with the highest
regional profit margin across all divisions. The
rest of Asia shows much promise includingSouth Korea and India.
Sales performance
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Acquisition History
Since 1999, SBUX has acquired 7 businesses with $912.3 million total cumulative revenues.
SBUXs strategy has been to gradually expand the product line and gain control of the input costs and
supply chain needed to gain the most profit from that expansion. This has provided SBUX rapid cost savings and the addition of installed base and channels which has
created significant cross-sell/up-sell opportunities.
M&A Transaction History
Date Target Description Deal
1999 Tazo Tea tea & herbal tea manufacturer and distributor $8.1m
2003 Seattle Co ee Company specialty coffee retailer and wholesaler based inSeattle
$72m
2005 Ethos Water brand of bottled water with a social mission of"helping children get clean water."
$8m
2008 Co ee EquipmentCompany
Seattle-based manufacturer of coffee equipment $74.2m
2011 Evolution Fresh American-based company producing fruit juices, fruit
smoothies, gourmet soups, salads and signaturebowls
$30m
2012 Teavana specialty tea and tea accessory retailer based inAtlanta
$620m
2012 La Boulange French Bakery $100m
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TRADE IDEA
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Valuation Considerations
To evaluate the fundamental value of Starbucks
shares, I have built a 5-year discounted cash flowforecast for FY14-18E, incorporating my keyassumptions about the future potential of thecompany.
On a DCF basis, the company is intrinsicallyvalued at $83.7. Starbucks shares are currentlytrading on the NASDAQ Capital Market $78.86
per share (6%).
Tax rate 32%
Cost of debt: 4.7%
Long-term growthrate
1.8%
Cost of equity: 10.5%
WACC: 10.3%
2013 negative free cash flow of $1.7 billion is the result of a one-time litigationcharge. Minus this charge, growth in free cash flow would have increased. Sowe should not overweight this factor in the company valuation.
Given (i) industry-leading comp momentum and cash-on-cash returns, (ii)
accelerating U.S. unit growth, (iii) an outsized international opportunity(particularly China) and (iv) multiple drivers of medium-to-long term CPGgrowth that altogether I believe in an OUTPERFORM rating and 84 pricetarget.
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Discounted Cash Flow Analysis
Financial Year (Dec. Year end) 2013 2014 2015 2016 2017 2018 Terminal Period
Total Turnover 14,892 16,338 18,072 19,782 21,575 23,551
growth (%) 9.7% 10.6% 9.5% 9.1% 9.2%
EBIT -325 2,859 3,488 3,956 4,531 5,181
margin (%) -2.2% 17.5% 19.3% 20.0% 21.0% 22.0%
Depreciation & Amortisation 621.4 736.1 792.3 859.4 934.8 1,017.5
Tax @ 32.0% 104.1 (914.9) (1116.1) (1266.1) (1449.9) (1658.0)
Capital Expenditure (1151.2) 980.3 1084.3 1186.9 1294.5 1413.1
Capex/Sales (%) 7.7% -6.0% -6.0% -6.0% -6.0% -6.0%
Working Capital 0.0 (588.9) (126.4) (109.8) (123.2) (137.5)
Working Capital / Sales (%) 0.0% 3.6% 0.7% 0.6% 0.6% 0.6%
Free Cash Flow 1,551.3 1,111.1 1,953.4 2,253.1 2,598.0 2,990.2 2,990.2
Discount Factor 0.9064 0.8216 0.7447 0.6750 0.6119 0.6119
Terminal Value 35,485
Present Value 1,007.1 1,604.9 1,677.9 1,753.7 1,829.6 21,712Enterprise Value (m) 65,071
Net Debt as at (Dec 2013) 1299.4
Market Capitalisation (m) 63,771
No. Shares (m) 762
Share Price ( ) 83.7
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APPENDIX
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Starbucks Income Statement
Starbucks
Hist. Hist. Hist Proj. Proj. Proj. Proj. Proj.
Income Statement
31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Net Sales 11,700.4 13,299.5 14,892.2 16,337.6 18,072.0 19,782.2 21,575.4 23,551.3
COGS 4,915.5 5,813.3 6,382.3 6,739.3 7,292.1 7,912.9 8,522.3 9,185.0
SG&A 5,056.4 5,488.8 8,835.3 6,739.3 7,292.1 7,912.9 8,522.3 9,185.0
EBIT 1,728.5 1,997.4 (325.4) 2,859.1 3,487.9 3,956.4 4,530.8 5,181.3
Depreciation&Amortization 523.3 550.3 621.4 736.1 792.3 859.4 934.8 1,017.5
Amortization 0.0 0.0 0.0 0.0 0.0
EBITDA 2,251.8 2,547.7 296.0 3,595.2 4,280.2 4,815.9 5,465.6 6,198.8
Non-recurring items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest Income 115.9 94.4 123.6 12.9 0.0 0.0 0.0 0.0
Interest Expense (33.3) (32.7) (28.1) 58.2 65.8 70.4 80.2 98.2Profit before taxes 1,811.1 2,059.1 (229.9) 2,813.8 3,422.1 3,886.0 4,450.6 5,083.1
Taxes 563.1 674.4 (238.7) 1,547.6 1,882.2 2,137.3 2,447.8 2,795.7
Profit after tax 1,248.0 1,384.7 8.8 1,266.2 1,540.0 1,748.7 2,002.8 2,287.4
Net earnings attribut. to nncontr. Interests 2.3 0.9 0.5 1.0 1.0 1.0 1.0 1.0
Net income 1,245.7 1,383.8 8.3 1,265.2 1,539.0 1,747.7 2,001.8 2,286.4
Shareholder information
Basic weighted average shares outstanding 748.3 754.4 749.3
Diluted weighted average shares outstanding 769.7 773.0 762.3 770.0 770.0 770.0 770.0 770.0
Diluted earnings per share $1.62 $1.79 $0.01 $1.64 $2.00 $2.27 $2.60 $2.97
Dividends per share $0.56 $0.72 $0.89 $1.11 $1.39 $1.74 $2.17 $2.72
Dividends 419.0 543.2 666.9 856.6 1,070.8 1,338.5 1,673.1 2,091.4
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Starbucks Balance Sheet
Starbucks
Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.
Balance Sheet
31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Assets
Current assets
Cash and cash equivalents 1,148.1 1,188.6 2,575.7 0.0 0.0 0.0 0.0 0.0
Sales, maturities and callsAccounts receivable 386.5 485.9 561.4 571.8 632.5 692.4 755.1 824.3
Inventories 965.8 1,241.5 1,111.2 1,179.4 1,276.1 1,384.8 1,491.4 1,607.4
Other current assets 1,294.5 1,283.6 1,223.1 1,633.8 1,807.2 1,978.2 2,157.5 2,355.1
Total current assets 3,794.9 4,199.6 5,471.4 3,384.9 3,715.8 4,055.4 4,404.1 4,786.8
Non-current assets
Net PP&E 2,355.0 2,658.9 3,200.5 3,444.6 3,736.7 4,064.2 4,423.9 4,819.5Goodwill 321.6 399.1 862.9 862.9 862.9 862.9 862.9 862.9Other intangibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other assets 888.9 961.6 1,981.9 1,470.4 1,626.5 1,780.4 1,941.8 2,119.6
Total assets 7,360.4 8,219.2 11,516.7 9,162.9 9,941.9 10,762.8 11,632.7 12,588.8
Liabilities
Current liabilities
Short term debt 0.0 0.0 0.0 1,288.4 1,342.7 1,473.4 1,735.3 2,192.0Accounts payable and accruals 2,075.8 2,209.8 2,593.2 2,493.5 2,698.1 2,927.8 3,153.2 3,398.4Accrued litigation charge 0.0 0.0 2,784.1 0.0 0.0 0.0 0.0 0.0
Total current liabilities 2,075.8 2,209.8 5,377.3 3,782.0 4,040.8 4,401.2 4,888.6 5,590.4
Non-current liabilities
Total long-term debt 549.5 549.6 1,299.4 0.0 0.0 0.0 0.0 0.0Other long-term liabili ties 347.8 345.3 357.7 490.1 542.2 593.5 647.3 706.5
Total liabilities 2,973.1 3,104.7 7,034.4 4,272.1 4,583.0 4,994.7 5,535.9 6,296.9
Equity
Common stock 0.7 0.7 0.8 0.7 0.7 0.7 0.7 0.7Retained earnings 4,297.4 5,046.2 4,130.3 4,538.9 5,007.0 5,416.3 5,745.0 5,940.0
Treasury stock 86.8 62.1 349.1 349.1 349.1 349.1 349.1 349.1Noncontrolling interests 2.4 5.5 2.1 2.1 2.1 2.1 2.1 2.1
Total equity 4,387.3 5,114.5 4,482.3 4,890.8 5,358.9 5,768.2 6,096.9 6,291.9Total Liab.& Equity 7,360.4 8,219.2 11,516.7 9,162.9 9,941.9 10,762.8 11,632.7 12,588.8
Balance?
OK OK OK OK OK OK OK OK
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Starbucks Cash Flow Statement
Starbucks
Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.
Cash Flow Statement
31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Net Income 1248.0 1384.7 8.8 1265.2 1539.0 1747.7 2001.8 2286.4
Depreciation 550.0 580.6 655.6 736.1 792.3 859.4 934.8 1017.5
Amortisation 0 0 0 0.0 0.0 0.0 0.0 0.0
Change in OWC 166.4 189.0 (1016.9) (3373.0) (126.4) (109.8) (123.2) (137.5)
Change in other assets -306.0 -488.5 249.2 511.5 (156.1) (153.9) (161.4) (177.8)
Change in other liabilities -46.0 84.5 227.5 132.4 52.0 51.3 53.8 59.3
Litigation charge 0.0 0.0 2784.1 0.0 0.0 0.0 0.0 0.0
Cash from Operating Activities 1612.4 1750.3 2908.3 -727.8 2100.8 2394.7 2705.7 3047.8
Sales, maturities and calls of investments 430.0 1796.4 1040.2 0.0 0.0 0.0 0.0 0.0
Capex 531.9 856.2 1151.2 980.3 1084.3 1186.9 1294.5 1413.1
Others 1027.6 1914.2 1300.2 0.0 0.0 0.0 0.0 0.0
Cash from Investing Activities -1989.5 -4566.8 -3491.6 -980.3 -1084.3 -1186.9 -1294.5 -1413.1
Change in Common Stock -305.5 -312.5 -340.9 -0.1 0.0 0.0 0.0 0.0
Dividends -389.5 (513.0) (628.9) (856.6) (1070.8) (1338.5) (1673.1) (2091.4)
Long Term Debt Repayment 0.0 0.0 714.5 (1299.4) 0.0 0.0 0.0 0.0
Other 87.0 80.0 147.1 0.0 0.0 0.0 0.0 0.0
Change in Non Controlling Int. 3.1 (3.4) 0.0 0.0 0.0 0.0 0.0
Cash from Financing Activities (608.0) (742.4) (111.6) (2156.1) (1070.8) (1338.5) (1673.1) (2091.4)
Effect of exchange rate -0.8 9.7 -1.8 0 0 0 0 0
Net Cash Flow -985.9 -3549.2 -696.7 (3864.1) (54.3) (130.7) (261.9) (456.6)
Beginning Cash 1164 1148.1 1188.6 2575.7 (1288.4) (1342.7) (1473.4) (1735.3)
Ending Cash 1148.1 1188.6 2575.7 (1288.4) (1342.7) (1473.4) (1735.3) (2192.0)
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Starbucks Financial Assumptions
Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.
31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Sales growth 13.7% 12.0% 9.7% 10.6% 9.5% 9.1% 9.2%
COGS as % of sales 54.5% 43.7% 42.9% 41.3% 40.4% 40.0% 39.5% 39.0%Annual depr. as % of previous PPE 23.4% 23.4% 23% 23% 23% 23% 23%
SG&A as % of sales 43.2% 41.3% 59.3% 41.3% 40.4% 40.0% 39.5% 39.0%
Amortization of other intangibles amount 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Non-recurring items amount 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Effective tax rate 31.1% 32.8% 103.8% 55.0% 55% 55% 55% 55%
Diluted weighted average shares outstanding 769.7 773.0 762.3 770 770 770 770 770
Dividend per share growth rate 28.6% 23.6% 25% 25% 25% 25% 25%
Accounts receivable as % of sales 3.3% 3.7% 3.8% 3.50% 3.50% 3.50% 3.50% 3.50%
Inventories % of COGS 15.1% 21.4% 17.4% 17.50% 17.50% 17.50% 17.50% 17.50%
Other current assets % of sales 11.1% 9.7% 8.2% 10% 10% 10% 10% 10%
Capital expenditures % of sales 4.5% 6.4% 7.7% 6% 6% 6% 6% 6%
Other assets % of sales 7.6% 7.2% 13.3% 9% 9% 9% 9% 9%
Accounts payable and accruals % of COGS 32.5% 38.0% 40.6% 37% 37% 37% 37% 37%
Accrued litigation charge % of tax expense 0.0% 0.0% (1166.4%) 0% 0% 0% 0% 0%
Other long-term liabilities % of sales 3.0% 2.6% 2.4% 3% 3% 3% 3% 3%
Common stock amount 0.7 0.7 0.8 0.7 0.7 0.7 0.7 0.7
Share repurchases $ amount (show as positive) 24.7 (287.0) 0.0 0.0 0.0 0.0 0.0
Loans due for repayment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other long-term debt repayment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Short term debt 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Loans due for repayment 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Other long-term debt repayment 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Cash 1.00% 1.00% 1.00% 1.00% 1 .00% 1.00% 1.00% 1.00%
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Starbucks Revenue Forecasts
Operating Profit (EBIT)
Actual Actual Actual Forecast Forecast Forecast Forecast Forecast2011 2012 2013 2014 2015 2016 2017 2018
EBIT 1728.5 1997.4 -325.4 2331 2720 2987 3056 3252
EBIT Margin (%) 15% 15% -2% 18% 19% 20% 21.00% 22.00%
EBIT Growth (%) 16% -116% -816% 17% 10% 2% 6%
FINAL REVENUES
FORECAST
2014 2015 2016 2017 2018
Americas 10,532 11,006 11,501 12,019 12,560EMEA 1,183 1,207 1,231 1,256 1,281
CAP 1,100 1,320 1,585 1,901 2,282
Other 504 562 620 906 993
Channel 3,018 3,976 4,845 5,493 6,436
Total
16,338 18,072 19,782 21,575 23,551
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Starbucks Operating Assumptions
Opened stores Stores open as ofsept 30, 2012
Opened Closed NetStores open as of
sept 29, 2013
Americas 7802 319 -43 276 8078
EMEA 882 34 -63 -29 853
CAP 666 252 -12 240 906
Other segments 14 353 -10 343 357
Worldwide
9364 958 -128 830 10194
Revenues growth
2011 2012 2013 2014 2015 2016 2017 2018Americas 8% 8% -10% 6% 5% 5% 5% 5%
EMEA 3% 0% 2% 2% 2% 2% 2% 2%
CAP 22% 15% 27% 20% 20% 20% 20% 20%
Consolidated
8% 7% 7% 7% 7% 7% 7% 7%
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