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Its more than just coffee!. Buy Recommendation By: Thomas Ezra. Who is Starbucks?. Starbucks Corporation is the largest coffeehouse chain in the world holding more than 12,000 stores worldwide and serving over 40 million people a week.

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buy recommendation by thomas ezra

Its more than just coffee!

Buy Recommendation

By: Thomas Ezra

who is starbucks
Who is Starbucks?

Starbucks Corporation is the largest coffeehouse chain in the world holding more than 12,000 stores worldwide and serving over 40 million people a week.

“Starbucks Corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide. The company offers brewed coffees, espresso beverages, cold blended beverages, various complementary food items, coffee-related accessories.”

proposed holdings

Sbux Starbucks Corporation details

Current Price $28.59 

Proposed Sell of THI

Purchase equivalent SBUX

$3,757.05 / 135 shares

Proposed Holdings
so why is the street killing it
So why Is the street killing it?
  • Starbucks reported recently that same store sales did not grow during the latest quarter. Investors had become accustomed to low single-digit growth.
  • And in February an internal memo was leaked in which company founder and Chairman Howard Schultz remarked he was worried that the company\'s rapid expansion was diluting the brand experience for its customers.
  • http://money.cnn.com/2007/06/08/markets/spotlight_sbux/

Check it out!

so why is the street killing it1
So why Is the street killing it?
  • McDonalds recently launched their coffee products and have made clear their interests in higher margin goods. (Golden Slacks)
  • Starbucks has also been feeling the pinch of rising commodity prices for things like milk, which raises costs, and gasoline, which can crimp consumer spending.
so why is the street killing it2
So why Is the street killing it?
  • Investors are also worried the costs of opening new stores, such as distribution expenses and commercial rent, are weighing on profit margins. Or worse, the new stores could start cannibalizing sales at existing locations.
so why is the street killing it3
So why Is the street killing it?

"(We) believe the roughly 28 percent sell-off since mid-November has created an attractive entry point for long-term investors," Glen Petraglia, an analyst with Citigroup, wrote in a recent research note.

starbucks strategy in a nutshell
Starbucks Strategy (in a nutshell)
  • Build significant branding
  • Create a strong corporate identity with consumers
  • Produce world class coffee
  • Create a cozy home like atmosphere

"If [consumers] see McDonald\'s has a good cup of coffee, you are going to find some people who will switch," said Howard Penney, an analyst with Prudential Equity Group.

Some analysts forget that Starbucks is selling more than just a cup of coffee. They have become the social hang out of our era. There is brand loyalty (Ipod)

slide10
CSR
  • Because Starbucks is has a strong branding strategy they push CSR considerably.
  • Starbucks has a social responsibility newsletter as well as a CSR report provided annually.
  • They have worked hard to ensue fair coffee bean procurement practices.
stunning consumption addicts
Stunning Consumption (addicts!)
  • Coffee ingestion on average is about a third that of tap water in most of North America and Europe.
  • The United States consumes around six billion gallons of coffee a year.
  • In 2002 in the U.S., average coffee consumption was 22.1 gallons per person.[40]
  • According to the NCA, for the first time since 1990, the percentage of U.S. adults who drink a daily cup of coffee exceeds those who drink a soft drink every day.
starbucks s products
Starbucks offers everything from Macchiatos to chai tea to breakfast sandwiches, books and music.

Just this week, Starbucks released ex-Beatle Paul McCartney\'s newest album, making him the first artist released on the company\'s new Hear Music record label.

Starbucks’s Products
revenue growth
Domestic

Historically Starbucks has been involved in domestic growth.

However, the domestic growth opportunity is shrinking.

International

International sales is the name of the game for Starbucks.

Currently, Starbucks operates in 37 countries.

Furthermore, Ed Schultz has set a long term goal of reaching 20,000 stores domestically, and 20,000 stores internationally.

During fiscal year 2007 Starbucks is expecting to erect another 2400 stores internationally.

Revenue Growth
starbucks commitment
Starbucks Commitment
  • Starbucks is fully committed to the expansion of international stores.
  • As of today there are 3544 international stores out of their 12440 stores worldwide. Their international locations make up 28% of their total store fronts.
  • “The Company’s International operations (“International”) represent 17% of Company-operated retail revenues and 18% of total specialty revenues as well as 17% of total net revenues.”
revenue dist
Revenue Dist
  • Licensing revenues, which are derived from retail store licensing arrangements, as well as grocery, warehouse club and certain other branded product operations, increased 28% to $861 million for fiscal 2006, from $673 million for fiscal 2005.
  • Foodservice and other revenues increased 13% to $343 million for fiscal 2006, from $304 million for fiscal 2005.
analysts estimates

The business has been pretty reliable, meeting or topping Wall Street earnings forecasts for the past eight quarters.

Analysts Estimates
growth drivers
Growth Drivers
  • Real Growth in GDP
  • An increase in Personal Disposable income
  • Strong Consumer Confidence
  • Interest Rates
  • CPI
industry outlook
Industry Outlook
  • The market has enormous room to grow internationally.
  • The future holds great potential to expand to the budding markets in the east.
  • Little room for growth in the states.
  • Coffee production is expected to remain consistent with little volatility.
swot analysis
SWOT Analysis
  • Strengths
    • Brand/Consumer Base/addiction
  • Weaknesses
    • Dependence on strong Coffee bean supply/milk supply
  • Opportunities
    • International Growth/maintain high growth
  • Threats
    • Fluctuations in coffee supply/milk supply/Substitutes/failure to maintain a strong brand name
porters five forces
Porters Five Forces
  • The threat of entry

- There is significant threat of entry into this market. Starbucks is know to acquire their local competition and has been successful in doing so. There are few barriers to entry, however Starbucks is creating barriers through innovative coffee flavors. in the industry.

  • The power of buyers

- Buyers are addicted and don’t know it. After looking at the consumption levels its clear price sensitivity is low. Furthermore, quality is a significant factor in this industry.

porters five forces cont d
Porters Five Forces Cont’d
  • The power of suppliers
    • This is by far Starbucks most significant threat. Because of the low level of supply with Starbucks special bean, suppliers have a lot of control. Moreover, Starbucks cannot purchase coffee in the commodity market because of high costs. This leaves the suppliers with a lot of flexibility.
  • The threat of substitutes
    • Though substitution is a threat, product quality and the “cool atmosphere” have created less a threat of substitute. sells their environment, not just the coffee. (McDonalds)
  • Competitive Rivalry
    • This market is intensely competitive, however I wouldn’t consider it a rivalry between any of the firms.
cost of equity
The Ke was calculated using CAPM.

Rf rate of 4.882 (10yr Note)

B of 1.16 (bottom up beta)

Rp of 5.00 Just to keep Dragos off my back.

Cost of equity = 8.57

Cost Of Equity
recommendation intrinsic value
Recommendation & Intrinsic Value
  • Buy!!!!!!!!
  • Current Price is 28.59
  • Current Valuation Price is ____
  • Approximately % Undervalued
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