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Starbucks Improving Across the Board: Is That Enough?

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Starbucks Corp. is an impressive turnaround story. Currently priced close to $23, it needs to continue beating and raising EPS estimates much higher than consensus to justify a higher valuation. Originally published by Ascendere Associates LLC on February 16, 2010.www.ascenderellc.com
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Steve Castellano Ascendere Associates LLC [email protected] Page 1 Ascendere Associates LLC February 12, 2010 Steve Castellano [email protected] Starbucks Corp. (NasdaqGS: SBUX) Sector: Consumer Discretionary Industry: Restaurants Starbucks Corp. is bucking the trend We took a quick look at Starbucks in early 2009, and as generalists searching for the best relative opportunity among 3000+ stocks that trade on major U.S. exchanges, were not impressed. Fundamental metrics were trending poorly, international markets were in full fledged recession, and a premium-branded coffee and related items seemed like easy things for the consumer to give up in the quest for newfound frugality. New initiatives announced upon the return of Starbucks' founder Harold Schultz to the CEO role in January 2008 did not seem to be having a measurable effect. The stock peaked close to $40 in December 2006 and traded as low as$7 in 2008. But March 2009 results marked the turning point. The cumulative effect of new initiatives focused on controlling operating costs, improving operating efficiency, strengthening connections among customers and the closure of 900 stores and the announced lay off of 7000 employees and attrition of thousands more have translated into significant operating momentum which seems likely to continue through 2010 and perhaps beyond. Impressive operating momentum since early 2009 Since the end of 2008, Starbucks has seen a significant decline in capital spending, operating capital has been reduced, and various measures of profitability and cash flow have drastically improved. In more detail, since December 2008 Starbucks has reduced estimated Operating Capital by $1.6b to $6.9b from $8.6b, while estimated adjusted operating profit has improved SBUX LTM FY+1 FY+2 LTM 5yr Avg Insiders Stock Price $22.60 EPS: 0.76 $ EPS: $1.10 EPS: $1.25 ROE: 19.1% ROE: 30.2% Own 2.7% EBITDA/ EBITDA/ Number of Market Cap $16.8b P/E: 29.9 P/E: 20.5 P/E: 18.1 Capital 42.8% Capital 38.3% Analysts 19 Debt to Enterprise Val $16.0b P/CF 11.0 P/CF 9.4 P/CF 8.6 Margin 9.7% Margin 9.3% Captial 14.0% Dividend Beta 1.35 P/S: 1.7 P/S: 1.6 P/S: 1.6 Margin 5.7% Margin 6.0% Yield 0.0% Description: Starbucks Corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide. It offers brewed coffees, related beverages and complementary food items. It also produces and sells various ready-to-drink beverages. Its brand portfolio includes Starbucks, Seattle’s Best Coffee and others. There are not many companies in which nearly every fundamental metric we look at is improving across the board. But they do exist, and one such impressive company is Starbucks Corp. At the current level, SBUX is a good option for growth investors that expect significant upside to current consensus forecasts -- because we do think there is some chance of this occurring. SBUX is also currently a good stock idea for high turnover portfolios driven by constantly updated relative value decisions, such as the Ascendere Long/Short Model Portfolio. But given our preference for highlighting stock ideas that show good value against sustained operating momentum, we would prefer portfolio managers wait for a better price, closer to $17-19, or at most at 15.2x the consensus FY2011 EPS estimate. Such a purchase price would allow participation in a possible resurgent growth story without being aggressive. Our target 1yr value is $23, which is below the consensus average target of $25 and derived from a scenario analysis indicating a realistic valuation range of $9-46. For the stock price to reach near the high end of our range, we think the company would have to generate EPS approaching $1.70 in fiscal 2011 and show accelerating growth beyond. In contrast, the consensus EPS estimate for FY2011 is $1.25 and the consensus high is $1.41. While these optimistic scenarios are aggressive, they are also plausible under perfect conditions.
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Page 1: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 1

Ascendere Associates LLC February 12, 2010 Steve Castellano [email protected] Starbucks Corp. (NasdaqGS: SBUX) Sector: Consumer Discretionary Industry: Restaurants

Starbucks Corp. is bucking the trend We took a quick look at Starbucks in early 2009, and as generalists searching for the best relative opportunity among 3000+ stocks that trade on major U.S. exchanges, were not impressed. Fundamental metrics were trending poorly, international markets were in full fledged recession, and a premium-branded coffee and related items seemed like easy things for the consumer to give up in the quest for newfound frugality. New initiatives announced upon the return of Starbucks' founder Harold Schultz to the CEO role in January 2008 did not seem to be having a measurable effect. The stock peaked close to $40 in December 2006 and traded as low as$7 in 2008. But March 2009 results marked the turning point. The cumulative effect of new initiatives focused on controlling operating costs, improving operating efficiency, strengthening connections among customers and the closure of 900 stores and the announced lay off of 7000 employees and attrition of thousands more have translated into significant operating momentum which seems likely to continue through 2010 and perhaps beyond. Impressive operating momentum since early 2009 Since the end of 2008, Starbucks has seen a significant decline in capital spending, operating capital has been reduced, and various measures of profitability and cash flow have drastically improved. In more detail, since December 2008 Starbucks has reduced estimated Operating Capital by $1.6b to $6.9b from $8.6b, while estimated adjusted operating profit has improved

SBUX LTM FY+1 FY+2 LTM 5yr Avg

Insiders

Stock Price $22.60 EPS: 0.76$ EPS: $1.10 EPS: $1.25 ROE: 19.1% ROE: 30.2% Own 2.7%

EBITDA/ EBITDA/ Number of

Market Cap $16.8b P/E: 29.9 P/E: 20.5 P/E: 18.1 Capital 42.8% Capital 38.3% Analysts 19

Debt to

Enterprise Val $16.0b P/CF 11.0 P/CF 9.4 P/CF 8.6 Margin 9.7% Margin 9.3% Captial 14.0%

Dividend

Beta 1.35 P/S: 1.7 P/S: 1.6 P/S: 1.6 Margin 5.7% Margin 6.0% Yield 0.0%

Description: Starbucks Corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide. It offers brewed coffees, related beverages and complementary food items. It also produces and sells various ready-to-drink beverages. Its brand portfolio includes Starbucks, Seattle’s Best Coffee and others.

There are not many companies in which nearly every fundamental metric we look at is improving across the board. But

they do exist, and one such impressive company is Starbucks Corp.

At the current level, SBUX is a good option for growth investors that expect significant upside to current consensus

forecasts -- because we do think there is some chance of this occurring. SBUX is also currently a good stock idea for high

turnover portfolios driven by constantly updated relative value decisions, such as the Ascendere Long/Short Model

Portfolio. But given our preference for highlighting stock ideas that show good value against sustained operating

momentum, we would prefer portfolio managers wait for a better price, closer to $17-19, or at most at 15.2x the

consensus FY2011 EPS estimate. Such a purchase price would allow participation in a possible resurgent growth story

without being aggressive.

Our target 1yr value is $23, which is below the consensus average target of $25 and derived from a scenario analysis

indicating a realistic valuation range of $9-46. For the stock price to reach near the high end of our range, we think the

company would have to generate EPS approaching $1.70 in fiscal 2011 and show accelerating growth beyond. In

contrast, the consensus EPS estimate for FY2011 is $1.25 and the consensus high is $1.41. While these optimistic

scenarios are aggressive, they are also plausible under perfect conditions.

Page 2: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 2

more than 3x to $762m from $211m over the same period. Anyway you look at it -- EBIT, adjusted EBITDA, free cash flow -- profitability has surged since December 2008 while the amount of capital required to create this profitability has declined. This has helped the company generate a ROIC higher than its cost of capital for the first time in several quarters. In addition, this has put $700m+ in cash on its balance sheet bringing the total to $1.4b cash and short-term investments. In the most recent conference call the company said it expects to conclude work on a distribution strategy for this excess cash in the coming months. Starbucks learned valuable lessons in its domestic market CEO Harold Schultz summarized the recent improvements in the company’s January 20, 2010 conference call transcribed by Seeking Alpha for the fiscal first quarter that ended on 12/27/2009: “This was a very satisfying quarter by any standard and follows three successive quarters of continued improvement in our business. Our U.S.-company operated stores reached a significant milestone in Q1 as all regions reported positive comp growth and our U.S.-licensed stores also delivered strong results. As in prior quarters, our business this quarter benefited mightily from continued innovation from the success of our company wide efforts to improve customer experience from our continued laser focus on controlling operating costs and improving operating efficiency and from the impact of decisive actions we took early in 2008.” Given the significant operating improvements seen thus far, maybe it is not a surprise the stock has seen a 165% rally from a March 2009 low of $8.27 to a recent close of $21.91, outperforming the S&P 500 return of 56% and the S&P Discretionary SPDR (XLY) return of 78% over the same period. If estimates are revised further upward, there could be more room for SBUX to move. Upside possible if company remains focused and if global economies improve We find the current consensus estimates that imply continued improvements for ROIC and solid earnings growth believable and perhaps containing some potential to move even higher, which makes us comfortable with not overly-weighting a negative valuation scenario. The company seems to have learned some valuable lessons in its U.S. market, and has recently started increasing marketing spending to drive revenue on some key growth platforms and initiatives. It is also increasing investment in its well-received VIA instant coffee product and on efforts to "refresh" the designs of existing Starbuck stores. In addition, the company intends to apply the lessons learned in the U.S. to international markets. For now, international efforts appear to be concentrated in the U.K., France, Spain and China. Starbucks believes China will become its largest market outside of the U.S. If Starbucks can drive revenue in China and other international locations to one-half to two-thirds of the level of growth experienced in its early growth phase in the United States, there could be significant upside to consensus revenue and earnings growth forecasts. Relative valuation summary Starbucks is currently trading at 20.2x NTM consensus EPS of $1.12 versus a 5yr average of 26.8x and a range of 10.1-53.4x. Fifteen sell side analysts provide targets ranging $13 to $30 and average $25. Nineteen sell side analysts provide FY2011 EPS estimates ranging from $1.15 to $1.41 and average $1.25. On a relative EV/EBITDA basis, SBUX trades at a slight discount to a peer average, and on a PE basis it is at a premium. Given its high growth prospects and ROIC profile, these multiples are justifiable and actually offer a slightly better adjusted value at this snapshot in time -- but they do not point to an overwhelming bargain. Scenario analysis We have chosen 4 different scenarios in which to value Starbucks. Numerous underlying factors can be summarized in the long-term earnings growth rates on a 10% WACC and 2.5% terminal growth rate -- 21%, 18%, 8% and negative 3%. A more aggressive 9% WACC and 3% terminal growth rate may be justifiable, and could positively impact our range of targets by about $1-10.

The most realistic but conservative assumption in our opinion is the 8% growth scenario, which suggests the stock deserves to trade at only about 17x the consensus NTM EPS estimate of about $1.12 or at about $19 one year from now.

Page 3: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 3

But If SBUX can beat and raise estimates throughout the next two years and get on track to close to 18% earnings growth on average for the next 5 years and moving higher beyond that, perhaps the stock should be more appropriately valued at $30, or about 18x an above-consensus-high FY2012 EPS estimate of $1.70. We are comfortable with these assumptions for this particular scenario because we think they reflect the possibility of continued operating momentum and a growing penchant for China and other countries to embrace a number of American brands.

A $46 stock price target is justifiable under the right conditions, though a bit farfetched at the moment. Such a target would have to assume flawless execution, faster than anticipated international expansion and a rebound in the global economies so that the company could resume a growth rate seen 5 to 10 years ago. True believers would have to justify a target earnings growth rate of 21% compounding to $2.80 by FY2015 and accelerating at a higher rate beyond.

If Starbucks runs into additional problems or the economies falter again so that earnings essentially decline 3% on average over the next few years, a fundamentally justifiable target could be $9 today.

Simple Microsoft Excel models for SBUX revenue growth and operating margin assumptions that we used to help generate realistic scenarios for optimistic earnings growth are available at our website www.ascenderellc.com. The current stock price embeds assumptions for continued operating momentum that can drive consensus estimates higher. While that is possible, we recommend waiting for a pullback to the $17-19 level before purchasing this stock. Using a most likely possible target range of $17 to $30 by next year does not provide an overwhelmingly compelling risk/reward with the stock at $22. However, for the portfolio manager that is required to purchase a Consumer Discretionary stock immediately, or is managing a portfolio with high turnover in which decisions can be quickly adjusted (such as the Ascendere Long/Short Model Portfolio), SBUX in our opinion is the best idea at the moment. Our current estimated stock price target for SBUX is $23, which is outlined in the table below.

We are aware of our seemingly contradictory recommendation -- that on a relative basis SBUX is slightly more attractive but on a standalone basis is less so. This raises two basic questions though with very large implications: Is the entire Discretionary sector is embedding overly optimistic assumptions on a global economic recovery? Or will SBUX in retrospect confirm our past observations that in general sell side analyst estimates lag the market rather than anticipate it? It is probably a little bit of both. Risks Ascendere Associates LLC can makes no guarantee on the accuracy of the data, estimates, assumptions or forecasts in this report. Investing in SBUX or any equity entails a high degree of risk, including the risk of total loss. This report is not a solicitation to buy or sale any securities.

Page 4: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 4

About Ascendere Associates LLC J. Stephen Castellano – Steve founded Ascendere Associates LLC to provide custom equity research and financial consulting services for institutional and high net worth clients. Steve has been involved in equity research, strategic studies and financial writing since 1995, and has more than 10 years of experience in equity research analysis. At PaineWebber, Warburg Dillon Read and Credit Lyonnais Securities he developed fundamental equity valuation models and conducted in-depth research on the steel and telecom services industries. At Boston Private Value Investors, he developed quantitative models for stock idea generation and also provided general fundamental equity research coverage. Steve received a MBA from the F. W. Olin School of Business at Babson College (2005) and a BA from Oberlin College (1993). For more information, visit us at www.ascenderellc.com. Steve’s career history is highlighted below:

Ascendere Associates LLC (2009-Present)

Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009)

Pyramid Research, Contract Consultant, Telecom Services (2002-2003)

Credit Lyonnais Securities (USA), Equity Research, Telecom Services, Vice President (2000-2001)

Warburg Dillon Read, Equity Research, Telecom Services, Research Associate (1999-2000)

PaineWebber, Equity Research, Steel and Nonferrous Metals, Research Associate, Editor (1995-1999)

Page 5: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 5

Summary of Various ROIC and Efficiency Ratios

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Starbucks Corp.Consumer Discretionary

RestaurantsSBUX

Operating Assets Components FQ FQ-1 FQ-2 FQ-3 FQ-4 FQ-5 FQ-6 FQ-7 FQ-8

Net PP&E 2,483 2,536 2,594 2,658 2,823 2,956 2,947 3,052 2,993

Goodwill 263 259 257 261 262 267 235 223 216

Other Intangibles 69 68 68 67 67 67 66 58 42

Other Long-term Assets 704 677 696 691 685 635 647 621 517

Net Working Capital (ex cash) (552) (211) (177) (150) (364) (50) (138) (169) (521)

Cash (estimated requirement) 900 666 337 295 396 322 350 372 535

Total Operating Assets 3,866 3,996 3,776 3,822 3,868 4,197 4,107 4,157 3,784

LTM EBITDA 1,523 1,336 1,244 1,132 1,119

Average Operating Assets 3,865 3,932 3,954 4,030 4,023

Back of Envelope ROIC 39.4% 34.0% 31.5% 28.1% 27.8%

NasdaqGS:SBUX Estimate Estimate Estimate Estimate Estimate

3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008

LTM EBITDA 1,839 1,816 1,771 1,677 1,623 1,530 1,343 1,244 1,132 1,123

Avg. Total Capital 4,436 4,249 4,021 3,797 3,683 3,556 3,529 3,538 3,604 3,589

EBITDA / Total Cap 41.5% 42.7% 44.0% 44.2% 44.1% 43.0% 38.1% 35.1% 31.4% 31.3%

LTM EBIT 1,288 1,268 1,227 1,129 1,068 970 780 647 532 517

Avg. Total Capital 4,436 4,249 4,021 3,797 3,683 3,556 3,529 3,538 3,604 3,589

EBIT / Total Cap 29.0% 29.9% 30.5% 29.7% 29.0% 27.3% 22.1% 18.3% 14.7% 14.4%

Earnings from Continuing Operations 870 848 829 793 769 568 391 246 88 172

Average Total Equity 3,932 3,732 3,509 3,289 3,072 2,886 2,714 2,600 2,525 2,449

Return on Equity 22.1% 22.7% 23.6% 24.1% 25.0% 19.7% 14.4% 9.5% 3.5% 7.0%

Estimate Estimate Estimate Estimate Estimate

NasdaqGS:SBUX 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008

NOPLAT 948 943 920 835 768 764 618 418 247 212

Economic Charge 716 717 719 717 716 718 695 735 689 719

Economic Profit 232 226 200 118 52 46 (76) (316) (442) (507)

Sequential growth 3% 13% 69% 128% 13% -160% -76% -28% -13% 23%

NOPLAT 948 943 920 835 768 764 618 418 247 212

Operating Capital 6,904 6,914 6,940 6,912 6,908 6,930 7,031 7,368 7,596 8,557

ROIC (NOPLAT / Operating Capital) 13.7% 13.6% 13.2% 11.9% 10.7% 10.2% 7.9% 5.2% 3.0% 2.6%

Sequential growth 1% 3% 12% 11% 5% 28% 52% 73% 17% -50%

Page 6: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 6

Competitor Overview

Page 7: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 7

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Starbucks Corp.NasdaqGS:SBUX >---------------------------Calendar Year---------------------------<

EV / EV /

Company Stock Mkt Total Total Enterprise Rev EBITDA EPS EPS PE PE

Ticker Name Price Val Cash Debt Other Val 2010E 2011E 2010E 2011E 2010E 2011E

NasdaqGS:SBUX Starbucks Corp. 22.65$ $ 16,771 $ 1,357 $ 550 $ 13 $ 15,977 1.5x 7.7x $ 1.12 $ 1.28 20.2x 17.7x

NYSE:MCD McDonald's Corp. 63.59 68,841 2,202 11,084 - 77,724 3.3x 8.6x $ 4.43 $ 4.82 14.4x 13.2x

NYSE:YUM Yum! Brands, Inc. 33.36 15,617 353 3,266 89 18,619 1.7x 7.4x $ 2.40 $ 2.69 13.9x 12.4x

NYSE:THI Tim Hortons Inc. 29.58 5,339 196 379 1 5,523 2.5x 8.5x $ 1.88 $ 2.11 15.7x 14.0x

NYSE:DRI Darden Restaurants, Inc. 38.99 5,420 62 1,805 0 7,162 1.0x 7.1x $ 2.87 $ 3.19 13.6x 12.2x

NYSE:CMG Chipotle Mexican Grill, Inc. 102.80 3,324 238 4 - 3,089 1.8x 9.1x $ 4.11 $ 4.89 25.0x 21.0x

NasdaqGS:PNRA Panera Bread Co. 73.58 2,298 173 - (0) 2,125 1.4x 7.9x $ 3.38 $ 3.90 21.8x 18.9x

NYSE: EAT Brinker International Inc. 17.81 1,797 110 591 - 2,278 0.7x 5.7x $ 1.46 $ 1.56 12.2x 11.4x

EV / EV /

Rev EBITDA EPS EPS PE PE

Calendar Year Comps 2010E 2011E 2010E 2011E 2010E 2011E

NasdaqGS:SBUX 1.5x 7.7x 1.12$ 1.28$ 20.2x 17.7x

Peer Average 1.8x 7.8x 16.7x 14.7x

Peer Min 0.7x 5.7x 12.2x 11.4x

Peer Max 3.3x 9.1x 25.0x 21.0x

Page 8: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 8

Sensitivity Analysis

Page 9: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 9

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Sensitivity Analysis

Starbucks Corp.

Consumer Discretionary

Restaurants

NasdaqGS:SBUX 22.60$ 2/12/2010

Resurgent Optimistic Implied Pessimistic

>--------------------10-year Historical Range--------------------< 2000s

Low Average Median High YTD Scenario +8 Scenario +3 Consensus Scenario -3

Adjusted Present Value current 42$ 28$ 17$ 9$

Adjusted Present Value +12 months 46$ 30$ 19$ 11$

Unlevered equity discount rate 10.2% 10.2% 10.2% 10.2%

Tax shield discount rate 6.3% 6.3% 6.3% 6.3%

Levered equity discount rate 10.2% 10.2% 10.2% 10.2%

After tax cost of debt 4.4% 4.4% 4.4% 4.4%

WACC 10.0% 10.0% 10.0% 10.0%

Risk free rate 3.5% 3.5% 3.5% 3.5%

Market risk premium 7.1% 7.1% 7.1% 7.1%

Terminal growth rate 2.5% 2.5% 2.5% 2.5%

Equity beta 1.35 1.35 1.35 1.35

Industry asset beta, company levered 1.32 1.32 1.32 1.32

Industry asset beta 0.94 0.94 0.94 0.94

Next 5yr Sales CAGR 10.0% 6.7% 3.7% 0.7%

Next 5yr Free Cash Flow CAGR 12.6% 8.1% 2.1% -2.5%

Next 5yr EPS CAGR 21.1% 17.6% 8.1% -2.8%

ROIC FY2010E 27.4% 27.4% 27.4% 27.4%

ROIC FY2011E 42.7% 43.4% 31.8% 20.5%

ROIC FY2015E 82.7% 66.9% 43.0% 24.6%

Page 10: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 10

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Sensitivity Analysis

Starbucks Corp.

Consumer Discretionary

Restaurants

NasdaqGS:SBUX 22.60$ 2/12/2010

Resurgent Optimistic Implied Pessimistic

>--------------------10-year Historical Range--------------------< 2000s

Low Average Median High YTD Scenario +8 Scenario +3 Consensus Scenario -3

Adjusted Present Value current 42$ 28$ 17$ 9$

Adjusted Present Value +12 months 46$ 30$ 19$ 11$

Y/Y Sales Growth FY2010E -5.9% 18.2% 21.6% 29.9% 4.1% 5.0% 5.0% 5.0% 5.0%

Y/Y Sales Growth FY2015E 18.5% 6.0% 3.0% 0.0%

Gross Margin FY2010E 55.3% 57.6% 58.0% 59.2% 57.9% 55.0% 55.0% 55.0% 55.0%

Gross Margin FY2015E 59.4% 59.4% 57.9% 56.4%

Gross Margin Expansion 4.4% 4.4% 2.9% 1.4%

SG&A + R&D Margin FY2010E 37.4% 39.3% 39.6% 40.7% 37.5% 43.0% 43.0% 43.0% 43.0%

SG&A + R&D Margin FY2015E 41.0% 41.0% 44.0% 47.0%

SG&A Margin Expansion -2.0% -2.0% 1.0% 4.0%

EBITDA Margin FY2010E 12.2% 15.6% 15.8% 18.3% 18.3% 17.7% 17.7% 17.7% 17.7%

EBITDA Margin FY2015E 23.9% 23.9% 19.4% 14.9%

EBITDA Margin Expansion 6.2% 6.2% 1.7% -2.8%

EBIT Margin FY2010E 6.3% 9.6% 9.6% 13.2% 13.2% 12.0% 12.0% 12.0% 12.0%

EBIT Margin FY2015E 18.4% 18.4% 13.9% 9.4%

EBIT Margin Expansion 6.4% 6.4% 1.9% -2.6%

Debt FY2010E 5 404 177 1,270 550 557 557 557 557

Debt FY2015E 557 557 557 557

Cash FY2010E 118 445 339 1,357 1,357 1,871 1,872 1,872 1,872

Cash FY2015E 10,574 10,159 7,663 5,511

Page 11: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 11

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Sensitivity Analysis

Starbucks Corp.

Consumer Discretionary

Restaurants

NasdaqGS:SBUX 22.60$ 2/12/2010

Resurgent Optimistic Implied Pessimistic

>--------------------10-year Historical Range--------------------< 2000s

Low Average Median High YTD Scenario +8 Scenario +3 Consensus Scenario -3

Adjusted Present Value current 42$ 28$ 17$ 9$

Adjusted Present Value +12 months 46$ 30$ 19$ 11$

EPS FY2010E (+1 FY) 0.33 0.64 0.58 1.12 1.12 1.08 1.08 1.08 1.08

EPS FY2011E (+2 FY) 0.40 0.76 0.71 1.28 1.28 1.67 1.69 1.22 0.78

EPS FY2015E 2.80 2.42 1.59 0.94

Justified PE FY2010E (+1 FY) 20.2 42.6 28.1 17.5 10.2

Justified PE FY2011E (+2 FY) 17.7 27.5 17.9 15.5 14.2

Sales FY2010E (+1 FY) 10,259 10,264 10,264 10,264

Sales FY2011E (+2 FY) 10,756 10,902 10,594 10,286

Justified EV / Sales FY2010E (+1 FY) 3.1 2.0 1.2 0.7

Justified EV / Sales FY2011E (+2 FY) 2.9 1.9 1.2 0.7

EBITDA FY2010E (+1 FY) 1,820 1,821 1,821 1,821

EBITDA FY2011E (+2 FY) 2,472 2,506 1,958 1,438

Justified EV / EBITDA FY2010E (+1 FY) 17.1 11.3 6.9 3.8

Justified EV / EBITDA FY2011E (+2 FY) 12.6 8.2 6.4 4.8

Free Cash Flow FY2010E (+1 FY) 1,332 1,357 1,046 751

Free Cash Flow FY2011E (+2 FY) 26 17 10 6

Justified EV / Free Cash Flow FY2010E (+1 FY) 23.4 15.2 12.0 9.1

Justified EV / Free Cash Flow FY2011E (+2 FY) 25.8 17.1 10.4 5.7

Page 12: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 12

WACC Assumptions

Page 13: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 13

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Peer Group Cost of Capital

Starbucks Corp. McDonald's Corp. Yum! Brands, Inc. Tim Hortons Inc. Darden Restaurants, Inc.Chipotle Mexican Grill, Inc.Panera Bread Co.

Company NasdaqGS:SBUX NYSE:MCD NYSE:YUM NYSE:THI NYSE:DRI NYSE:CMG NasdaqGS:PNRA Average

Cost of Equity:

Beta S&P (5-yr monthly) 1.35 0.65 1.05 0.84 0.93 1.18 0.87 0.98

Industry average beta, levered 0.94 1.02 1.05 0.96 1.12 0.92 0.92 0.99

Current Risk Free Rate (US 10yr bond) 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

Equity Risk Premium 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%

Cost of Equity 10.2% 10.8% 11.0% 10.4% 11.5% 10.1% 10.1% 10.6%

Cost of Debt:

Estimated Cost of Debt 4.9% 4.4% 5.7% 5.2% 5.1% 10.4% 0.0% 5.1%

Normalized Tax Rate 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5%After Tax Cost of Debt 3.1% 2.8% 3.5% 3.2% 3.2% 6.5% 0.0% 3.2%

Capital Structure:

Debt to Equity Ratio 3.5% 16.3% 21.3% 7.3% 34.4% 0.1% 0.0% 11.8%

Unlevered Beta 1.32 0.59 0.93 0.80 0.77 1.18 0.87 0.92

Cost of Capital

Equity 16,132 67,902 15,303 5,218 5,248 3,167 2,237 16,458

Debt 557 11,084 3,266 379 1,805 4 0 2,442

Market Value of Total Capitalization 16,689 78,986 18,569 5,597 7,052 3,171 2,237 18,900

Weighting

Equity 96.7% 86.0% 82.4% 93.2% 74.4% 99.9% 100.0% 90.4%

Debt 3.3% 14.0% 17.6% 6.8% 25.6% 0.1% 0.0% 9.6%

Cost

Equity 10.2% 10.8% 11.0% 10.4% 11.5% 10.1% 10.1% 10.6%

Debt 3.1% 2.8% 3.5% 3.2% 3.2% 6.5% 0.0% 3.2%

Weighted Average Cost of Capital (WACC) = 10.0% 9.6% 9.7% 9.9% 9.4% 10.1% 10.1% 9.8%

Page 14: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 14

$17 Current Fair Value Price Derived in Part by Consensus Average Estimates

Page 15: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 15

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

ConsensusImplied by consensus FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020

9/27/2009 9/27/2010 9/27/2011 9/27/2012 9/27/2013 9/27/2014 9/27/2015 9/27/2020

Income Statement

Acquired sales - - - - - - - -

Disposed Sales - - - - - - - -

Total sales 9,775 10,264 10,594 11,028 11,470 11,928 12,286 14,243

Total sales growth 0.00% 5.00% 3.22% 4.10% 4.00% 4.00% 3.00% 3.00%

Gross margin 55.8% 55.0% 57.0% 57.6% 57.7% 57.8% 57.9% 58.0%

SG&A margin 41.1% 43.0% 44.0% 44.0% 44.0% 44.0% 44.0% 44.0%

EBITDA 1,992 1,821 1,958 2,111 2,202 2,302 2,384 2,777

EBITDA margin 20.4% 17.7% 18.5% 19.1% 19.2% 19.3% 19.4% 19.5%

EBIT 1,429 1,236 1,376 1,505 1,571 1,646 1,708 1,994

EBIT margin 14.62% 12.04% 12.98% 13.64% 13.70% 13.80% 13.90% 14.00%

Other recurring income - - - - - - - -

Nonrecurring income - - - - - - - -

Net interest expense (18) (9) 13 35 58 82 106 241

Tax rate 30.1% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0%

Earnings from Continuing Operations986 822 930 1,032 1,092 1,158 1,215 1,497

Shares outstanding 746 763 763 763 763 763 763 763

EPS from Continuing Operations 1.32 1.08 1.22 1.35 1.43 1.52 1.59 1.96

Dividend per share - - - - - - - -

Dividends - - - - - - - -

Cash Flow Statement

Cash from Operations 1,389 1,747 1,606 1,716 1,790 1,862 1,923 2,310

Cash from InvestingCash from Investing (446) (542) (551) (585) (621) (658) (692) (885)

Cash from Financing (1) (0) (0) - - - - -

Change in Cash 942 1,206 1,055 1,131 1,170 1,204 1,231 1,425

Free Cash Flow to the Firm

EBIAT 999 828 922 1,008 1,053 1,103 1,144 1,336

Depreciation 563 585 583 607 631 656 676 783

Capital investment (446) (542) (551) (585) (621) (658) (692) (885)

Adj working capital investment (161) (20) (2) (7) (8) (8) (6) (7)

Free cash flow 956 852 951 1,023 1,055 1,093 1,122 1,227

Economic Profit

Operating Capital 3,406 3,022 2,898 2,798 2,720 2,674 2,658 2,837

WACC (rough estimate) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Capital Charge 342 303 291 281 273 268 267 285

NOPAT (adjusted for leases, R&D) 999 828 922 1,008 1,053 1,103 1,144 1,336

Economic Profit 657 525 631 727 780 834 877 1,051

EP as % of Operating Capital 19.3% 17.4% 21.8% 26.0% 28.7% 31.2% 33.0% 37.1%

Adjusted Present Value

Unlevered equity discount rate 9.7% 9.7% 9.7% 10.2% 10.2% 10.2% 10.7%

Tax shield discount rate 6.0% 6.0% 6.0% 6.3% 6.3% 6.3% 6.5%

Terminal growth rate 2.0% 2.5% 3.0% 2.0% 2.5% 3.0% 2.0%

Current Value 17 18 19 16 17 17 15

+12 Months Value 19 20 21 18 19 20 17

Page 16: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 16

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

ConsensusFY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020

9/27/2009 9/27/2010 9/27/2011 9/27/2012 9/27/2013 9/27/2014 9/27/2015 9/27/2020

Balance Sheet

Cash 666 1,872 2,927 4,058 5,228 6,432 7,663 14,407

Accounts Receivable 271 263 249 247 250 257 263 303

Inventory 665 545 514 510 517 531 544 626

Other Current Assets 434 419 395 392 398 408 418 481

Total Current Assets 2,036 3,099 4,085 5,206 6,393 7,628 8,887 15,817

Gross PP&E 5,701 6,242 6,793 7,378 7,999 8,657 9,349 13,368

Net PP&E 2,536 2,493 2,461 2,440 2,429 2,431 2,447 2,771

Other Fixed Assets 581 581 581 581 581 581 581 581

Total Fixed Assets 3,118 3,074 3,042 3,021 3,010 3,012 3,028 3,352

Total Assets 5,153 6,173 7,127 8,227 9,403 10,640 11,915 19,169

Accounts Payable 267 242 245 254 266 277 285 330

Other NIB Current Liabilities 1314 1537 1557 1617 1689 1758 1810 2096

Total NIB Current Liabilities 1581 1779 1803 1871 1955 2035 2094 2426

Total Debt 557 557 557 557 557 557 557 557

Capital Leases - - - - - - - -

Minority Interest - - - - - - - -

Shareholder Equity 3,046 3,867 4,798 5,829 6,921 8,079 9,294 16,217

Total Capital 3,614 4,436 5,366 6,398 7,489 8,647 9,862 16,785

Other Non Current Liabilities (42) (42) (42) (42) (42) (42) (42) (42)

Total Liabilities and SE 5,153 6,173 7,127 8,227 9,403 10,640 11,915 19,169

Working Capital

Current Assets Less Adj Cash 1,739 1,957 1,983 2,058 2,151 2,239 2,304 2,668

Current Liabilities Less Debt 1,581 1,779 1,803 1,871 1,955 2,035 2,094 2,426

Adj Net Working Capital 158 178 180 187 196 204 209 243

NWC as a % of Sales 1.6% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7%

Adj Working Capital Turnover 62 61 59 60 60 60 60 60

Cash Cycle

Days Inventory in Stock 56 48 42 40 39 38 38 38

Days Sales Outstanding 10 10 9 8 8 8 8 8

Days Payables Outstanding 23 21 20 20 20 20 20 20

Cash Cycle 43 37 32 29 27 26 26 26

Operating Efficiency

NI / Sales 10.1% 8.0% 8.8% 9.4% 9.5% 9.7% 9.9% 10.5%

Sales / Operating Assets 287% 340% 366% 394% 422% 446% 462% 502%

Operating Assets / Equity 1.1 0.8 0.6 0.5 0.4 0.3 0.3 0.2

Operating ROE 32.4% 21.2% 19.4% 17.7% 15.8% 14.3% 13.1% 9.2%

Accounting Efficiency

(EBITDA - Capex) / Net Interest 86.4 135.4 NMF NMF NMF NMF NMF NMF

Debt/Equity 18% 16% 13% 10% 9% 7% 6% 4%

Debt/Total Capital 15% 14% 11% 9% 8% 7% 6% 3%

NI / Sales 10.1% 8.0% 8.8% 9.4% 9.5% 9.7% 9.9% 10.5%

Sales / Assets 189.7% 181.2% 159.3% 143.7% 130.1% 119.0% 108.9% 77.5%

Assets / Equity 1.7 1.9 1.7 1.6 1.5 1.4 1.4 1.2

ROE 32.4% 27.0% 24.1% 21.5% 18.7% 16.7% 15.0% 10.2%

ROA 19.1% 14.5% 14.0% 13.4% 12.4% 11.6% 10.8% 8.1%

ROI (Earnings / TotalCap) 27.3% 20.4% 19.0% 17.5% 15.7% 14.3% 13.1% 9.3%

ROIC (RetainEarn / TotalCap) 27.3% 20.4% 19.0% 17.5% 15.7% 14.3% 13.1% 9.3%

ROIC (Noplat / Operating Assets) 29.3% 27.4% 31.8% 36.0% 38.7% 41.2% 43.0% 47.1%

EBIT / Capital 39.5% 30.7% 28.1% 25.6% 22.6% 20.4% 18.5% 12.4%

EBITDA / Capital 55.1% 45.2% 40.0% 35.9% 31.7% 28.5% 25.8% 17.3%

Book value per share 4$ 5$ 6$ 8$ 9$ 11$ 12$ 21$

Page 17: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 17

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Consensus

Implied by consensus

Stock price 22.60

Shares outstanding 743.4 751.9

Market value 16,801

Cash (666)

Non operating assets -

Debt market value 557

Preferred stock market value -

Minority interest 11

Other non operating liabilities -

Enterprise Value 16,703

Unlevered Cost of Equity 10.2%

Pretax Cost of Debt 6.25%

Terminal growth rate 2.5%

Current WACC* 10.0%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm

Period - 1 2 3 4 5 6 7 8 9 10

Adjusted Present Value FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Total Sales 9,775 10,264 10,594 11,028 11,470 11,928 12,286 12,655 13,034 13,426 13,828 14,243

EBIT 1,429 1,236 1,376 1,505 1,571 1,646 1,708 1,772 1,825 1,880 1,936 1,994

Tax rate 30% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33%

Cash income taxes 430 408 454 497 519 543 564 585 602 620 639 658

EBIAT 999 828 922 1,008 1,053 1,103 1,144 1,187 1,223 1,259 1,297 1,336

Depreciation 563 585 583 607 631 656 676 696 717 738 761 783

Capital Spending, recurring (446) (542) (551) (585) (621) (658) (692) (727) (763) (802) (843) (885)

Adj Working Capital Investment (161) (20) (2) (7) (8) (8) (6) (6) (7) (7) (7) (7)

Free cash flow to the entity 956 852 951 1,023 1,055 1,093 1,122 1,151 1,170 1,189 1,208 1,227

Residual value of free cash flows 16,258

Free cash flow plus residual value 852 951 1,023 1,055 1,093 1,122 1,151 1,170 1,189 1,208 17,485

Present value of future cash flows - 863 842 787 740 690 641 591 545 503 6,598

Value of unlevered firm 12,800

Discount interest tax shields at cost of debt to determine value of interest tax shields

- 1 2 3 4 5 6 7 8 9 10

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Total Debt 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$

Cash interest expense as % of Debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%

Cash interest expense 35 35 35 35 35 35 35 35 35 35 35 35

Interest tax shield 11 11 11 11 11 11 11 11 11 11 11

Residual value of interest tax shields 314

Interest tax shields plus residual value 11 11 11 11 11 11 11 11 11 11 325

Cost of debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%

Present value of future cash flows - 11 10 10 9 8 8 8 7 7 178

Value of interest tax shields 255

Cost of Potential Bankruptcy

Probability of bankruptcy 4.0%

Negative impact to PV 100.0%

Unlevered firm value 12,800

Expected bankruptcy costs (512)

Valuation

Value of unlelvered firm 12,800

Value of interest tax shields 255

Expected bankruptcy costs (512) Current Value

Enterprise value 12,542 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shield

Cash 666 Current ValueConsensus0.09736675821886429.7% 17.32$ 17.96$ 18.70$ 6.0%

Other non-operating assets - Current ValueConsensus0.10236675821886410.2% 16.27$ 16.81$ 17.43$ 6.3%

Debt (557) Current ValueConsensus0.10736675821886410.7% 15.34$ 15.80$ 16.33$ 6.5%

Preferred -

Minority Interest (11)

Other non operating liabilities - Value 12+ months

Value of equity 12,640 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shield

Value 12+ monthsConsensus0.09736675821886429.7% 19.36$ 20.06$ 20.87$ 6.0%

Shares outstanding 751.9 751.9 Value 12+ monthsConsensus0.10236675821886410.2% 18.29$ 18.88$ 19.56$ 6.3%

Value per share 16.81 Value 12+ monthsConsensus0.10736675821886410.7% 17.34$ 17.85$ 18.42$ 6.5%

Page 18: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 18

Assumptions Required for a Target of $30 (The Consensus High)

Page 19: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 19

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Scenario +3Optimistic base line FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020

9/27/2009 9/27/2010 9/27/2011 9/27/2012 9/27/2013 9/27/2014 9/27/2015 9/27/2020

Income Statement

Acquired sales - - - - - - - -

Disposed Sales - - - - - - - -

Total sales 9,775 10,264 10,902 11,676 12,493 13,368 14,170 18,963

Total sales growth 0.0% 5.0% 6.2% 7.1% 7.0% 7.0% 6.0% 6.0%

Gross margin 55.8% 55.0% 58.5% 59.1% 59.2% 59.3% 59.4% 59.5%

SG&A margin 41.1% 43.0% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0%

EBITDA 1,992 1,821 2,506 2,761 2,961 3,182 3,387 4,551

EBITDA margin 20.4% 17.7% 23.0% 23.6% 23.7% 23.8% 23.9% 24.0%

EBIT 1,429 1,236 1,906 2,118 2,274 2,446 2,607 3,508

EBIT margin 14.6% 12.0% 17.5% 18.1% 18.2% 18.3% 18.4% 18.5%

Other recurring income - - - - - - - -

Nonrecurring income - - - - - - - -

Net interest expense (18) (9) 16 46 78 113 150 372

Tax rate 30.1% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0%

Earnings from Continuing Operations986 822 1,288 1,450 1,576 1,715 1,847 2,600

Shares outstanding 746 763 763 763 763 763 763 763

EPS from Continuing Operations 1.32 1.08 1.69 1.90 2.07 2.25 2.42 3.41

Dividend per share - - - - - - - -

Dividends - - - - - - - -

Cash Flow Statement

Cash from Operations 1,389 1,747 1,935 2,188 2,354 2,523 2,685 3,713

Cash from InvestingCash from Investing (446) (542) (567) (619) (676) (738) (798) (1,178)

Cash from Financing (1) (0) (0) - - - - -

Change in Cash 942 1,206 1,368 1,569 1,678 1,786 1,887 2,535

Free Cash Flow to the Firm

EBIAT 999 828 1,277 1,419 1,523 1,639 1,747 2,350

Depreciation 563 585 600 642 687 735 779 1,043

Capital investment (446) (542) (567) (619) (676) (738) (798) (1,178)

Adj working capital investment (161) (20) (1) (12) (14) (15) (13) (18)

Free cash flow 956 852 1,309 1,430 1,520 1,622 1,716 2,197

Economic Profit

Operating Capital 3406 3022 2943 2824 2722 2651 2610 2706

WACC (rough estimate) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Capital Charge 342 303 295 284 273 266 262 272

NOPAT (adjusted for leases, R&D) 999 828 1277 1419 1523 1639 1747 2350

Economic Profit 657 525 982 1136 1250 1373 1485 2079

EP as % of Operating Capital 19.3% 17.4% 33.4% 40.2% 45.9% 51.8% 56.9% 76.8%

Adjusted Present Value

Unlevered equity discount rate 9.7% 9.7% 9.7% 10.2% 10.2% 10.2% 10.7%

Tax shield discount rate 6.0% 6.0% 6.0% 6.3% 6.3% 6.3% 6.5%

Terminal growth rate 2.0% 2.5% 3.0% 2.0% 2.5% 3.0% 2.0%

Current Value 28 30 31 27 28 29 25

+12 Months Value 31 32 34 29 30 31 28

Page 20: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 20

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020

9/27/2009 9/27/2010 9/27/2011 9/27/2012 9/27/2013 9/27/2014 9/27/2015 9/27/2020

Balance Sheet

Cash 666 1,872 3,239 4,808 6,486 8,272 10,159 21,490

Accounts Receivable 271 263 256 261 272 288 303 403

Inventory 665 545 529 540 563 595 627 834

Other Current Assets 434 419 407 415 433 458 482 641

Total Current Assets 2,036 3,099 4,431 6,024 7,755 9,612 11,571 23,367

Gross PP&E 5,701 6,242 6,809 7,429 8,105 8,842 9,640 14,711

Net PP&E 2,536 2,493 2,460 2,437 2,426 2,429 2,447 2,861

Other Fixed Assets 581 581 581 581 581 581 581 581

Total Fixed Assets 3,118 3,074 3,041 3,018 3,007 3,010 3,028 3,442

Total Assets 5,153 6,173 7,472 9,043 10,762 12,622 14,599 26,809

Accounts Payable 267 242 243 260 279 299 317 423

Other NIB Current Liabilities 1314 1537 1547 1651 1775 1901 2013 2691

Total NIB Current Liabilities 1581 1779 1790 1911 2054 2200 2329 3114

Total Debt 557 557 557 557 557 557 557 557

Capital Leases - - - - - - - -

Minority Interest - - - - - - - -

Shareholder Equity 3,046 3,867 5,155 6,605 8,181 9,896 11,743 23,169

Total Capital 3,614 4,436 5,724 7,174 8,749 10,464 12,311 23,737

Other Non Current Liabilities (42) (42) (42) (42) (42) (42) (42) (42)

Total Liabilities and SE 5,153 6,173 7,472 9,043 10,762 12,622 14,599 26,809

Working Capital

Current Assets Less Adj Cash 1,739 1,957 1,969 2,102 2,260 2,420 2,562 3,426

Current Liabilities Less Debt 1,581 1,779 1,790 1,911 2,054 2,200 2,329 3,114

Adj Net Working Capital 158 178 179 191 205 220 233 311

NWC as a % of Sales 1.6% 1.7% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6%

Adj Working Capital Turnover 62 61 61 63 63 63 63 63

Cash Cycle

Days Inventory in Stock 56 48 43 41 40 39 39 39

Days Sales Outstanding 10 10 9 8 8 8 8 8

Days Payables Outstanding 23 21 20 19 19 19 19 19

Cash Cycle 43 37 32 30 28 27 27 27

Operating Efficiency

NI / Sales 10.1% 8.0% 11.8% 12.4% 12.6% 12.8% 13.0% 13.7%

Sales / Operating Assets 287% 340% 371% 413% 459% 504% 543% 701%

Operating Assets / Equity 1.1 0.8 0.6 0.4 0.3 0.3 0.2 0.1

Operating ROE 32.4% 21.2% 25.0% 22.0% 19.3% 17.3% 15.7% 11.2%

Accounting Efficiency

(EBITDA - Capex) / Net Interest 86.4 135.4 NMF NMF NMF NMF NMF NMF

Debt/Equity 18% 16% 12% 9% 8% 6% 5% 3%

Debt/Total Capital 15% 14% 11% 9% 7% 6% 5% 2%

NI / Sales 10.1% 8.0% 11.8% 12.4% 12.6% 12.8% 13.0% 13.7%

Sales / Assets 189.7% 181.2% 159.8% 141.4% 126.2% 114.3% 104.1% 74.6%

Assets / Equity 1.7 1.9 1.8 1.6 1.5 1.4 1.4 1.2

ROE 32.4% 27.0% 33.3% 28.1% 23.9% 21.0% 18.7% 12.6%

ROA 19.1% 14.5% 18.9% 17.6% 15.9% 14.7% 13.6% 10.2%

ROI 27.3% 20.4% 25.4% 22.5% 19.8% 17.8% 16.2% 11.6%

ROIC (RetainEarn / TotalCap) 27.3% 20.4% 25.4% 22.5% 19.8% 17.8% 16.2% 11.6%

ROIC (Noplat / Net Assets) 29.3% 27.4% 43.4% 50.3% 56.0% 61.8% 66.9% 86.9%

ROC 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

CROC 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Book value per share 4 5 7 9 11 13 15 30

Page 21: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 21

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Scenario +3

Optimistic base line

Stock price 22.60

Shares outstanding 743.4 751.9

Market value 16,801

Cash (666)

Non operating assets -

Debt market value 557

Preferred stock market value -

Minority interest 11

Other non operating liabilities -

Enterprise Value 16,703

Unlevered Cost of Equity 10.2%

Pretax Cost of Debt 6.25%

Terminal growth rate 2.5%

Current WACC* 10.0%

Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm

Period - 1 2 3 4 5 6 7 8 9 10

Adjusted Present Value FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Total Sales 9,775 10,264 10,902 11,676 12,493 13,368 14,170 15,020 15,921 16,877 17,889 18,963

EBIT 1,429 1,236 1,906 2,118 2,274 2,446 2,607 2,779 2,945 3,122 3,310 3,508

Tax rate 30% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33%

Cash income taxes 430 408 629 699 750 807 860 917 972 1,030 1,092 1,158

EBIAT 999 828 1,277 1,419 1,523 1,639 1,747 1,862 1,973 2,092 2,217 2,350

Depreciation 563 585 600 642 687 735 779 826 876 928 984 1,043

Capital Spending, recurring (446) (542) (567) (619) (676) (738) (798) (862) (932) (1,008) (1,090) (1,178)

Adj Working Capital Investment (161) (20) (1) (12) (14) (15) (13) (14) (15) (16) (17) (18)

Free cash flow to the entity 956 852 1,309 1,430 1,520 1,622 1,716 1,812 1,902 1,996 2,095 2,197

Residual value of free cash flows 29,111

Free cash flow plus residual value 852 1,309 1,430 1,520 1,622 1,716 1,812 1,902 1,996 2,095 31,308

Present value of future cash flows - 1,187 1,177 1,135 1,098 1,054 1,010 961 915 871 11,814

Value of unlevered firm 21,223

Discount interest tax shields at cost of debt to determine value of interest tax shields

- 1 2 3 4 5 6 7 8 9 10

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Total Debt 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$ 557$

Cash interest expense as % of Debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%

Cash interest expense 35 35 35 35 35 35 35 35 35 35 35 35

Interest tax shield 11 11 11 11 11 11 11 11 11 11 11

Residual value of interest tax shields 314

Interest tax shields plus residual value 11 11 11 11 11 11 11 11 11 11 325

Cost of debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%

Present value of future cash flows - 11 10 10 9 8 8 8 7 7 178

Value of interest tax shields 255

Cost of Potential Bankruptcy

Probability of bankruptcy 4.0%

Negative impact to PV 100.0%

Unlevered firm value 21,223

Expected bankruptcy costs (849)

Valuation

Value of unlelvered firm 21,223

Value of interest tax shields 255

Expected bankruptcy costs (849) Current Value

Enterprise value 20,629 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shield

Cash 666 Current ValueScenario +30.09736675821886429.7% 28.45$ 29.57$ 30.86$ 6.0%

Other non-operating assets - Current ValueScenario +30.10236675821886410.2% 26.62$ 27.57$ 28.65$ 6.3%

Debt (557) Current ValueScenario +30.10736675821886410.7% 25.01$ 25.81$ 26.72$ 6.5%

Preferred -

Minority Interest (11)

Other non operating liabilities - Value 12+ months

Value of equity 20,727 Terminal Growth

Equity 2.0% 2.5% 3.0% Tax shield

Value 12+ monthsScenario +30.09736675821886429.7% 31.11$ 32.34$ 33.75$ 6.0%

Shares outstanding 751.9 751.9 Value 12+ monthsScenario +30.10236675821886410.2% 29.24$ 30.28$ 31.47$ 6.3%

Value per share 27.57 Value 12+ monthsScenario +30.10736675821886410.7% 27.59$ 28.47$ 29.48$ 6.5%

Page 22: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 22

Consensus Quarterly Estimates and Implied Estimates

Page 23: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 23

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Days in Period Dep 91 91 91 91 91 91 91 91

Period Date 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008 9/28/2008 6/29/2008 3/30/2008

Period +5Q +4Q +3Q +2Q +1Q Last QTR QTR-1 QTR-2 QTR -3 QTR -4 QTR -5 QTR -6 QTR -7

Average Consensus Estimates - - -

Revenue 2,535 2,856 2,685 2,469 2,389 2,723 2,422 2,404 2,333 2,615 2,515 2,574 2,526

Gross Profit 1,238 1,474 1,314 1,221 1,162 1,577 1,381 1,361 1,290 1,418 1,326 1,411 1,419

SG&A 952 1,072 1,008 927 897 1,022 981 925 924 1,042 1,029 1,074 1,045

R&D - - - - - - - - - - - - -

EBITDA 425 543 443 428 402 498 349 374 309 311 250 262 300

Depreciation 139 141 137 134 136 138 140 141 141 141 173 145 146

EBIT (or EBT) 286 402 307 294 266 360 209 233 168 170 77 117 154

Income (recurring earnings) 198 273 203 196 176 254 167 172 117 109 70 84 105

Income (reported) 186 248 203 196 166 242 150 152 25 64 5 (7) 109

NOPLAT 5 23 85 67 4 146 200 172 35 (207) (218) (204) (95)

EP 6 26 82 66 6 122 240 126 64 (95) (222) (232) (63)

Free Cash Flow 236 343 217 228 231 345 274 283 259 (29) (8) (38) (43)

# of Consensus Estimates

Revenue 4 5 15 15 15

Gross Profit - - - - -

SG&A - - - - -

EBITDA 1 1 7 7 7

Depreciation - - - - -

EBIT (or EBT) 3 3 15 15 15

Income (recurring earnings) 3 3 14 14 13

Income (reported) 1 1 5 5 5

NOPLAT - - - - -

EP - - - - -

Free Cash Flow - - - - -

Margins 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008

Revenue growth 6.1% 4.9% 10.9% 2.7% 2.4% 4.1% -3.7% -6.6% -7.6% -5.5% 3.1% 9.1% 12.0%

Gross margin 48.8% 51.6% 48.9% 49.4% 48.7% 57.9% 57.0% 56.6% 55.3% 54.2% 52.7% 54.8% 56.2%

SG&A margin 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 40.5% 38.5% 39.6% 39.8% 40.9% 41.7% 41.4%

R&D margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

EBITDA margin 16.8% 19.0% 16.5% 17.3% 16.8% 18.3% 14.4% 15.6% 13.2% 11.9% 9.9% 10.2% 11.9%

Depreciation margin 5.3% 5.3% 5.3% 5.3% 5.4% 5.1% 5.8% 5.9% 6.1% 5.4% 6.9% 5.6% 5.8%

EBIT margin (or EBT) 11.3% 14.1% 11.4% 11.9% 11.1% 13.2% 8.6% 9.7% 7.2% 6.5% 3.1% 4.5% 6.1%

Income (recurring earnings) 7.8% 9.5% 7.6% 7.9% 7.4% 9.3% 6.9% 7.2% 5.0% 4.2% 2.8% 3.3% 4.1%

Income (reported) 7.3% 8.7% 7.6% 7.9% 6.9% 8.9% 6.2% 6.3% 1.1% 2.5% 0.2% -0.3% 4.3%

Page 24: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 24

Economic Profit Model (Implied by Consensus)

Page 25: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 25

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

ECONOMIC PROFIT MODEL

Starbucks Corp.

NasdaqGS:SBUX

8.5%

Economic Profit Model 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008 9/28/2008 6/29/2008 3/30/2008 12/30/2007

Adjusted Working Capital 102 101 99 97 96 96 94 95 97 99 100 100 98 95

Net PP&E 2,450 2,461 2,488 2,463 2,460 2,483 2,536 2,594 2,658 2,823 2,956 2,947 3,052 2,993

Other fixed assets 4,352 4,352 4,352 4,352 4,352 4,352 4,400 4,678 4,841 5,636 5,336 5,068 5,100 4,856

Operating Capital (McKinsey) 6,904 6,914 6,940 6,912 6,908 6,930 7,031 7,368 7,596 8,557 8,393 8,115 8,250 7,944

Cost of Debt 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 4.9% 4.7% 4.4% 4.4% 4.4% 4.8% 4.9% 5.4%

Cost of Equity 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.1% 10.2% 9.5% 8.9% 10.6% 10.7% 10.2% 10.8%

WACC* 10.4% 10.4% 10.4% 10.4% 10.4% 10.4% 9.9% 10.0% 9.1% 8.4% 9.9% 10.2% 9.7% 10.5%

Economic Charge 716 717 719 717 716 718 695 735 689 719 831 827 800 831

EBIT 1,288 1,268 1,227 1,129 1,068 970 780 647 532 517 661 794 897 958

Interest on Operating Leases 162 166 170 176 183 197 194 193 187 188 184 187 182 187

R&D Expenditure - - - - - - - - - - - - - -

R&D Amortization - - - - - - - - - - - - - -

Goodwill Amortization 2 2 2 2 2 2 2 2 2 2 2 1 1 1

Adjustment for Provisions and Extraordinary Items (246) (236) (228) (244) (275) (195) (195) (311) (398) (247) (168) (48) 111 108

Adjusted EBITA 1,206 1,200 1,170 1,062 977 973 780 530 322 460 679 934 1,192 1,255

Effective Tax Rate 31.4% 31.4% 31.4% 31.4% 31.4% 31.4% 30.1% 29.5% 10.9% 25.7% 31.3% 33.8% 35.6% 36.1%

Operating tax rate 21.5% 21.5% 21.5% 21.5% 21.5% 21.5% 20.8% 21.1% 23.5% 54.0% 38.2% 31.7% 29.3% 25.3%

Taxes on EBITA (259) (258) (251) (228) (210) (209) (162) (112) (76) (248) (260) (296) (350) (318)

Increase in deferred taxes (smoothed) - - - - - - - - - - - - - -

NOPLAT 948 943 920 835 768 764 618 418 247 212 419 638 842 937

Estimate Estimate Estimate Estimate Estimate

NasdaqGS:SBUX 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008

NOPLAT 948 943 920 835 768 764 618 418 247 212 419 638 842 937

Economic Charge 716 717 719 717 716 718 695 735 689 719 831 827 800 831

Economic Profit 232 226 200 118 52 46 (76) (316) (442) (507) (412) (190) 42 106

Sequential growth 3% 13% 69% 128% 13% -160% -76% -28% -13% 23% 117% -549% -60% 442%

NOPLAT 948 943 920 835 768 764 618 418 247 212 419 638 842 937

Operating Capital 6,904 6,914 6,940 6,912 6,908 6,930 7,031 7,368 7,596 8,557 8,393 8,115 8,250 7,944

ROIC (NOPLAT / Operating Capital) 13.7% 13.6% 13.2% 11.9% 10.7% 10.2% 7.9% 5.2% 3.0% 2.6% 5.2% 8.3% 11.4% 13.4%

Sequential growth 1% 3% 12% 11% 5% 28% 52% 73% 17% -50% -37% -28% -15% 2%

Page 26: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 26

Charts and Other

Page 27: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 27

Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Starbucks Corp. Price 22.6

SBUX NTM EPS 1.12$

Consumer Discretionary NTM PE 20.2

Restaurants R/R 0.6 to 1

Max up to ten years Three years One year One year historically implied target range

04/28/00 to 02/12/10 02/16/07 to 02/12/10 02/13/09 to 02/12/10 NTM EPS Target 22.60$

Max PE 40.0 04/26/02 Max PE 40.0 04/26/02 Max PE 23.8 09/18/09 Max EPS 1.22$ 29$ 29%

Average PE 28.6 Average PE 28.6 Average PE 19.7 Average EPS 1.12$ 22$ -3%

Min PE 10.0 11/21/08 Min PE 10.0 11/21/08 Min PE 11.2 03/06/09 Min EPS 1.01$ 11$ -50%

$-

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Price / Earnings (NTM) vs. Stock Price

P/E Average +1 St. Dev. -1 St. Dev. Stock Price

Page 28: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 28

Source: Capital IQ, Inc. data

Ticker: SBUX

Company: Starbucks Corp.

SBUX 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 2/12/2010 Last 5 years

TEV / NTM Total Revenue Average 2.9x 3.1x 2.1x 1.1x 1.2x 1.6x 1.8x

High 3.9x 3.6x 2.9x 1.4x 1.7x 1.7x 3.9x

Low 2.4x 2.6x 1.4x 0.7x 0.7x 1.5x 0.7x

Close 3.0x 2.8x 1.4x 0.8x 1.7x 1.5x 1.5x

TEV / NTM EBITDA Average 16.9x 18.5x 12.8x 7.5x 7.8x 9.4x 11.4x

High 22.1x 21.2x 17.6x 9.0x 10.5x 10.4x 22.1x

Low 13.8x 15.4x 8.7x 4.7x 4.7x 8.3x 4.7x

Close 17.1x 17.2x 8.9x 5.6x 10.2x 8.6x 8.6x

TEV / NTM EBIT Average 23.9x 26.6x 18.2x 11.8x 12.3x 13.8x 16.8x

High 32.2x 30.8x 24.8x 14.5x 15.7x 15.4x 32.2x

Low 19.6x 20.9x 12.6x 7.5x 7.5x 12.2x 7.5x

Close 25.5x 24.2x 12.9x 9.1x 15.1x 12.6x 12.6x

Price / NTM EPS Average 40.5x 45.1x 29.4x 17.7x 18.5x 21.3x 26.8x

High 53.4x 53.0x 40.9x 21.5x 23.8x 23.5x 53.4x

Low 32.9x 37.4x 19.5x 10.1x 11.1x 19.4x 10.1x

Close 40.6x 39.9x 20.0x 12.9x 22.9x 20.2x 20.2x

Page 29: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 29

Page 30: Starbucks Improving Across the Board:  Is That Enough?

Steve Castellano Ascendere Associates LLC [email protected] Page 30


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