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Buy Presentation: Starbucks Corporation (SBUX)

Buy Presentation: Starbucks Corporation (SBUX). Presentation Prepared By: Zoe Saridakis , Charles Alvarez, Adam Rudd, Alex Schneider, Brandon Stern, Larkin Bohanan , Ndue Palushi , Muhammad Bajwa , Tyler Ashe, Ryan Tomanocy. November 21 tst , 2013. Investment Thesis. Thesis.

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Buy Presentation: Starbucks Corporation (SBUX)

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  1. Buy Presentation: Starbucks Corporation (SBUX) Presentation Prepared By: Zoe Saridakis, Charles Alvarez, Adam Rudd, Alex Schneider, Brandon Stern, Larkin Bohanan, NduePalushi, Muhammad Bajwa, Tyler Ashe, Ryan Tomanocy November 21tst, 2013

  2. Investment Thesis Thesis Stock Price (5 Year) Starbucks Corp. would be an excellent addition to the Ithaca College Investment Club’s portfolio due to its strong potential for domestic and international growth, as well as our prediction that the company will continue to beat consensus estimates of earnings, affecting the share price in a positive manner. Starbucks has established itself as an industry leader through a diverse portfolio of premium products and service backed by consistent levels of quality and numerous avenues for potential revenue. In addition, the company has shown an aggressive, forward-looking acquisition strategy acquiring both La Boulange and Teavana in the past two years bringing value to both company and customers. As we look to the future, these factors should result in competitors struggling to maintain market position, likely resulting in sustained growth for Starbucks. Revenue/Cost of Goods Sold/Net Income

  3. Industry Overview and Recent Trends • The consumer coffee and café marketplace is saturated with companies like Dunkin Donuts, Green Mountain Coffee Roasters, Panera Bread, Krispy Kreme, Peet’s Coffee &Tea and other smaller players all competing for a piece of market share. • Trends and Challenges • A lot of growth in gourmet coffee and espresso drinks within the younger age demographic • Price of coffee beans is decreasing while drink prices remain consistent throughout the market • Starbucks continues to dominate the coffee industry and its recent acquisition of Teavana expects to bolster success • Trend towards single-cup home brewing systems (Keurig, Verismo*) • Growing population of whole-foods, health-conscious consumers • Challenges include staying atop of steadily performing competitors amongst high, seasonal, drink demand

  4. Recent Coffee Industry News • Starbucks Corp. opens its first Teavana Fine Teas & Tea Bar in New York City’s Upper East Side. • The opening of the tea bar comes one year after Starbucks announces its acquisition of Teavana for $620 million • Howard Schultz, Starbucks’ CEO – “This new store concept elevates the tea experience in the same way we’ve done for coffee.” • The market for tea has grown about 32% since 2007, making tea the second most popular drink behind water • Chinese media criticizes Starbucks pricing • A Starbucks grande latte in China costs $4.80 (27 Yuan) • The same latte in London costs around $3.97, $4.30 in New York City, and $2.39 in Mumbai • Fluctuations due to variations in input costs within each market, including shipping/freight • Starbucks concludes packaged coffee dispute with Kraft • 2.8 billion dollar arbitration settlement • Starbucks terminates agreement with Kraft to sell bags of coffee in grocery stores • Starbuck’s CFO, Troy Alstead - “We have the leading market share of premium packaged coffee, and our total at-home coffee portfolio has grown significantly…” • Alstead dismisses concern, commenting Starbucks has adequate liquidity, cash on hand, and borrowing capacity to finance the payment. • Green Mountain opens new Keurig Store in Burlington, MA. • Hoping to increase penetration of Keurig brewers among US households and take advantage of growing home brew segment • Aligns with strongest beverage brands, including Starbucks to support a range of consumer choices

  5. Company Overview and Operations Company Overview Revenue Stream Breakdown Starbucks is the world’s number one retailer of specialty coffee and has roughly 18,000 coffee shops in over 60 countries. The coffee giant is in the business of selling premium coffee, roasted beans, tea, food items and coffee accessories to the coffee consumer. The company operates more than 9,400 of its own shops while licensees and franchisees operate roughly 8,650 units worldwide. Outside of its retail stores, Starbucks owns Seattle’s Best Coffee as well as the Torrefazione Italia coffee brand. In addition, Starbucks shelves product within grocery stores and licenses its brand to other food and beverage products sold outside of Starbucks stores. Revenue: Primarily generated through its company-operated retail stores and specialty operations. Starbucks’ licensed stores generate revenue via licensing fees, royalties, and sales of coffee, tea, etc. In addition, Starbucks sells its coffee to food service operations like restaurants, offices, hotels, and cafes that operate under different licensing contracts. Starbucks also has partnerships with Pepsi and Dryer’s to develop and distribute ready-to-consume beverages and ice creams. Growth Plan: Increase sales of breakfast, lunch foods and tea. Expand on wholesale distribution and presence among international markets. Starbucks plans to close stores (mainly in the US) that have saturated the market, and replace them with new international stores. By the end of 2013 they will have added about 1,300 stores word-wide over the fiscal year, and around 600 new stores in China alone. Domestic vs. International Sales Revenue

  6. Product Portfolio • Beverages: Coffee / Tea / Other… • Starbucks offers blonde, medium, and dark roasts of coffee. Styles include the macchiato, latte, frappuccino, mocha, Americano, and espresso. On top of that, various flavored and seasonal coffees adorn their menus. Aside from coffee based products Starbucks offers other drinks including, chocolate beverages, smoothies, Starbucks Refreshers, and Tazo brand hot and iced teas. Customers may also purchase Starbucks Via Ready Brew, packaged whole bean, ground, and premium reserve coffees. • Teavana loose and packaged teas • Food: • Baked goods, Starbucks petite-sized treats, bistro boxes for lunch, hot breakfasts, sandwiches, paninis, salads, yogurt, and fruit • La Boulange café and bakery items • Coffee Accessories & Starbucks Merchandise: • Keurig K-Cup packs, Pods, Portion and Filler Packs, Verismomachines, apparel, mugs, CD’s, coffee presses, coffeemakers, espresso machines, grinders, teapots and tea kettles

  7. Marketing • Social media is Starbucks’ main marketing strategy. They have recently launched a new marketing campaign focused on the quality of coffee beans they use across all of their major social media platforms including; Twitter, Pinterest, Facebook, G+, and YouTube. In addition, the company launched My Starbucks Ideas, a website designed to allow customers to submit comments, suggestions and ideas directly to Starbucks. With more than 18,000 retail locations and counting in 60 countries, the coffee giant is everywhere it seems. With more than 250 locations in New York City alone Starbucks can market simply by being visible, accessible, and convenient to customers. • Expansion: • Starbucks practices an aggressive acquisition and partnering strategy joining with companies such as Green Mountain’s Keurig, Tazo Tea, La Boulange and most recently Teavana. This strategy increases Starbucks’ consumer reach while extending new lines for potential revenue.

  8. Valuation Comparable

  9. Operating Comparable

  10. Sector Ratio Analysis Valuation Ratios Financial Strength Profitability Efficiency Price to Sales Starbucks Corp: 3.94 Sector: 2.08 Price to Cash Flow Starbucks Corp: 20.11 Sector: 14.02 Current Ratio Starbucks Corp: 2.08 Sector: 1.45 Interest Coverage (TTM) Starbucks Corp: 78.55 Sector: 49.82 Operating Margin (TTM) Starbucks Corp: 14.82% Sector: 14.83% Net Profit Margin (TTM) Starbucks Corp: 11.56% Sector: 8.19% Receivable Turnover Starbucks Corp: 28.4 Sector: 60.39 Inventory Turnover Starbucks Corp: 5.4 Sector: 54.76

  11. Competitors Dunkin Brands Group Inc. (DNKN) Green Mountain Coffee Roasters, Inc. (GMCR) Strengths Dunkin plans to expand its nearly 7,000 restaurants to 15,000 worldwide. 222 new restaurants and counting, year to date The company showed 9% revenue growth, 47.9% adjusted operating income margin, and a 10.8% earnings per share growth. Weaknesses Expansion Westward may cause trouble for Dunkin, a brand well-established throughout the east, but with low market share in the West. High long-term debt Strengths On November 8th, GMCR opened their first retail Keurig store in Burlington, Massachusetts, helping to expand on their marketing mix. As of November 6th, 2013 the company showed a Relative Strength Index of 29.8, indicating the stock is “oversold.” This recent sell-off looks to create a solid buy situation for the long-term with the stock price hovering just above $60 per share. Weaknesses Five accounting irregularities have surfaced since the 2007 fiscal year in which Green Mountain neglected to adhere to GAAP. Inventory was overstated by 7.6 million and the wrong amount of income was disclosed on multiple periods.

  12. Competitors Peet’s Coffee and Tea, Inc. (PEET) Strengths Efficient employee training programs High quality service Strong brand recognition through signature product Easy access to product through grocery and convenience stores Weaknesses Minimal online ordering capability Weak menu Bad relations with franchisees (cost of equipment, packaging, ingredients, etc.) Uncertainty amongst international markets Unhealthy Strengths Control of all aspects of supply chain No debt Loyal customer base Weaknesses Only 30 locations outside of California Relatively unknown brand name compared to immediate competitors Strengths Strong management Unique and innovative menu, appeals to growing number of health-conscious consumers Weaknesses High prices High turnover of staff Poor cost structure, weakening margins Krispy Kreme Doughnuts, Inc. (KKD) Panera Bread Co. (PNRA)

  13. SWOT Analysis Strengths Weaknesses Opportunities Threats Strong brand identity Largest coffee retailer in the world Innovative and diversified product portfolio International expansion History of strong earnings reports Social responsibility to customers, employees and environment High product prices History of targeting a narrow market Expensive cost of inputs Imbalance in domestic sales vs. international sales Quality of La Boulange product Losing sight of coffee retail Strong potential for domestic expansion into East coast market Vision to continue increasing sales trend through a greater number of retail stores Increase in health conscious and environmentally aware consumers Great potential for domestic and international expansion Recent acquisitions of La Boulange and Teavana Competition from Dunkin Donuts, Panera and local coffee shops and cafés Cheaper substitutes of seemingly similar quality Slowing growth of domestic sales

  14. Analyst Recommendations • Analyst Recommendations and Fair Value Estimates • Consensus Rating Top Holders as of 11/17/2013 • Buys: 84.4% - FMR LLC (6.44%) • Holds: 15.6% - BlackRock (4.74%) • Sells: 0.0% - Vanguard Group Inc. (4.65%) • Credit Ratings • Bloomberg 1yr Default Likelihood: 0.0045% • Moody's Rating: N/A • S&P Rating: N/A

  15. Recommendation • We recommend the Ithaca College Investment Club purchase 13 shares of Starbucks Corp. at around $81.44 per share, and around 3.0% of our portfolio. We will maintain this position for 2-3 years. In the case of major economic downturn or another variable causing serious change in the stock’s value in the future, we will reassess appropriately.

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