Valuation of starbucks using residual enterprise income
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Valuation of Starbucks Using Residual Enterprise Income. Mitchell Schmitt. Relevant Facts. CEO is Howard Schultz (Highly Regarded) Headquartered in Seattle, WA $13.3 B in revenues in 2012 with operating margins of 15% Nearly 80% of stores are company-owned vs. franchised

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Relevant facts
Relevant Facts

  • CEO is Howard Schultz (Highly Regarded)

  • Headquartered in Seattle, WA

  • $13.3 B in revenues in 2012 with operating margins of 15%

  • Nearly 80% of stores are company-owned vs. franchised

  • SBUX has paid a dividend for the past 12 quarters


Strategy
Strategy

Mission Statement: To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.

  • Product Differentiation; Sell premium products with large profit margins

  • Outstanding Marketing Campaigns

  • Repeat Business (Starbucks cards)

  • Keep Employees Satisfied

  • Make entering their stores an experience

  • Company Operated stores


Products
Products

Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world

  • Frappuccino, Lattes, Iced Coffees, Espresso

  • Also sell tea, other beverages, and fresh food items

  • Sell packaged products through licensed stores, grocery stores, and other foodservice accounts

  • K-Cups and Coffee Grounds


Competition
Competition

  • Premium coffee sales compete against quick service restaurants and specialty coffee shops

  • Main competitors for this segment include Dunkin Donuts, McDonald’s, and Caribou Coffee

  • Competes with all packaged coffee and tea products sold through supermarkets and other retailers


Rei epat t r ent nea t 1
REI= EPATt- rent * NEAt-1

  • Valuation uses parsimonious forecasts previously calculated

  • REI is income in excess of that required given a company’s asset level and WACC

  • More accurate than FCF model due to predictions based on accounting information


Two parts of value
Two parts of value

  • Present Value of Forecasted REI

  • Continuing Value

    [REI *(1+g)/ (rent-g)]/ (1+rent)t

  • Sum is equal to enterprise value






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