Starbucks Valuation

Technical Analysis & Executive Summary

EXECUTIVE SUMMARY
AVOID: The analysis I’ve conducted has swayed me many different ways. There are three main
points that stick out in my minas I make my final recommendation to avoid Starbucks.
 Starbucks behind industry in true growth.
 Starbucks’ in store drink sales taking up less of their company sales pie year by year, yet
Starbucks is opening up more stores globally.
 Starbucks’ true value falls between $31.38- $43.41, currently trading at $81.09 (currently 46%-
62% rich)
Model Base Price Technical Analysis Buy/Sell
Cap. Earn. Model $31.35 Moving Average SELL
DDM $31.38 RSI WAIT
H-Model $31.45 Ichimoku WAIT
Target PE $43.41 Bollinger BUY
Reasons for Doubt
Starbucks’ true growth is lacking
when compared to the Restaurant industry.
With high turnover but lower net margins,
Starbucks’ is experiencing higher costs of
doing business because of the cyclical
market. When referring to Starbucks’ risk, I
will also mention their Baa credit rating by
Moody’s. Starbucks’ is a medium grade risk,
unfit for paying long-term debt but is able to
pay short-term debt. I believe this is due to
Starbucks’ CEO Howard Schultz hinting
that Starbucks’ was contemplating a $750
Million loan to pay for their new retail
stores. With coffee and their other
smorgasboard of drinks taking up 59% of
their sales pie, and shrinking every year,
Starbucks should not be trying to take on
more fixed assets for this shrinking profit.
They might be trying to raise that margin by
taking cappuccinos to areas where
cappuccinos have never been sipped, but
overseas stores are bringing in $630k/store
while U.S. stores are bringing in
$790k/store. Unless the cost of building is
cheaper overseas, the investment for new
stores does not sound feasible. When it
comes to restaurants being efficient, Panera
Bread is at the top of the restaurant game.
Their low costs, small stores, high prices for
gourmet sandwiches and low staffing is
becoming the blueprint for outperfoming the
competition. Panera is also outperfoming the
competition (including Starbucks in implied
5 year growth) with an implied growth of
15.1% while Starbucks’ implied 5 year
growth is only 11.3%. BOTTOM LINE:
Starbucks is overvalued. This was the crux
of this whole dicision. The DDM,
Capitalized Earnings Model and H-Model
all priced Starbucks in the low $30’s, while
the Target PE Model priced Starbucks’
intrinsic value just over $43. While smoke
and mirrors might be keeping potential
investors salivating fo rmore stores, that will
not bring true growth. I defend my position
to avoid unless Starbucks ceases their quest
to open 1500 more stores over the next two
years. They must focus on expanding their
profits in the packaged coffee and coffee
equipment/merchandise market. Here lies
the key to true growth. Imagine Starbucks
increasing their profits with no increase in
fixed assets, as they already produce
packaged coffee and coffee merchandise, so
no prospective new buildings for a
warehouse sounds imminent.

Technical Analysis
Technical analysis allows investors to forecast the direction which stocks are set to travel.
Analysts primarily use price and volume in order to predict the movement of stocks. Many
analysts and portfolio managers use this methodology, and are viewed as active investors. This
active investor view gives resistance to the view that the stock market correctly prices stocks at
all times. In other words, technical analysis debunks the idea the efficient-market theory is in fact
deficient. I will look at four methods of technical analysis.
 Moving Average
 Relative Strength Index (RSI)
 Ichimoku Clould
 Bollinger Bands
Moving Average
The moving average method averages the 50,100 and 200 day price of the stock. If the
current price of the stock is above the 50, 100 and 200 day averages of the stock (in that order)
then one should purchase the stock. If any of the four trend lines break the order, then one should
sell immediately, according to this method. As we can see in the chart above, the alignment
broke in late February. The price then fell from $56.20 to $53.08, then rebounded back above the
chart one week later. Since then, the chart has been in order from the beginning of March until
December 3rd
. The buyers from the last nine months are now looking to sell, so following this
model, the price of the stock should continue to fall as slong as active traders continue to sell
because of the breaking of this trend line. The price has dropped from $81.39 to $76.11 since the
breaking of the alignment. If we decide to follow recent history, this chart will rise re-align
within the next week.

Relative Strength Index (RSI)
The Relative Strength Index (RSI), is an indicator that measures the speed and change of
price movements. The RSI is mostly used on a 14 day timeframe, oscillating from a scale of 0 to
100, with a high (overbought and overvalued) level at 70 and a low (oversold & undervalued)
level at 30. RSI is defined here as the rate in the rise or fall in price. The RSI computes
momentum as the ratio of higher closes to lower closes. A security with a greater amount of
positive closes will have a higher RSI than securities with negative closesCurrently, Starbucks
seems right at the cusp of being undervalued, checking in at 32.71. If the RSI for Starbucks hits
or dips below 30, many active investors will be purchasing Starbucks stocks, judging by this
indicator.
Ichimoku Cloud
The Ichimoku Cloud is a versatile indicator that defines support and resistance, shows
trend direction, calculates momentum and provides trading signals. This chart is said to be able
to give an instant trade signal with just a quick glance to many investors. There are five clouds in
the picture (all blue) and a leading trend line (green) called Span A and another leading trend line
(white) called Span B. The overall trend is up when prices (trend lines) are above the cloud, and
down when prices are below the cloud and flat when they are in the cloud itself. When span A is
rising above span B the trend is stronger upward. When Span B rises above Span A, the trend is
stronger downward. As we can see from the chart above, the chart has been on an upswing since

early March and stayed on an upswing until early November, and then prices fell flat as the lines
dipped into the cloud. Bearish signals are reinforced when prices are below the cloud and bullish
signals are reinforced when the trend is above the cloud. This is the essence of trading in the
direction of the bigger trend. When signals counter to an existing long term uptrend, such as the
one above, these signals are deemed weaker. This short-term bullish signal in the Starbucks chart
above is less able to sway investors than bullish signals in a long-term downtrend. With the
current trend flat as the prices are in the cloud, look for the prices to jump back up above the
cloud as the chart continues on its long-term upward trend.
Bollinger
This technical trading tool shows a relative definition of high and low pricing for a stock.
The prices are at a ceiling at the top line in the chart above, and at a floor at the line above. There
are three curves in this chart, with the middle being the intermediate –term trend, or moving
average. The middle trend line serves as the base for the upper and lower band. The interval
between the upper, middle and lowe band are determined by volatility, typically the standard
deviation of the moving average (usually 21 days for this model). When the markets become
more volatile, the bands widen (move further away from the average), and during less volatile
periods, the bands contract (move closer to the average). The squeezing of the bands is often
used by technical traders as an early indication that the volatility is about to increase severely.
Just like the RSI, when the price reaches the lower band, that is the perfect time for an investor to
buy the stock, which is what is actually happening for Starbucks currently. When the price hits
the top band, that is the perfect time to sell.

Conclusion
 Moving Average : SELL NOW
 Relative Strength Index (RSI): BUY WHEN RSI HITS 30 (on the cusp of purchasing,
currently at 32.71)
 Ichimoku Clould: WAIT UNTIL TREND JUMPS ABOVE CLOUD
 Bollinger Bands: BUY NOW
I do believe there is some truth to technical analysis. The moving average and bollinger
bands are very convincing because they have been proved by history. The moving
average shows the price of Starbucks shooting down as soon as the trend lines break
alignment, which most likely caused a scare in active investors. Also, Starbucks has not
been able to breakout of its bands within the last year, until recently. Even though both of
these models make their case, they are currently advising me to make opposite decisions.
Judging on just these four charts alone, I recommend that we AVOID since we cannot
come to a consensus.

Retail Industry Analysis
Retail Industry
The retail industry is comprised by six main sub-groups; the apparel, department stores,
drug stores, home improvement stores, restaurants and supermarkets. Retail establishments
receive their finished products from manufacturers, which sell their products to wholesalers, and
the wholesalers sell these goods to the end users of the supply chain for a profit. . Retailing
functions mainly through brick-and-mortar locations and e-commerce.
Here is what I’m going to touch on: each sector of the retail industry, issues in the
retail industry and the inner workings of the retail industry:
 Porter’s 5 Forces
 Different Sects of Retail: Apparel, Department Stores, Discount Stores, Drug
Stores, Home Improvement & Restaurants
 Accounting & Regulatory Issues
 Conclusion
Porter’s 5 Forces
 Threat of new entrants: HIGH- In the retail industry, the amount of independent retailers
has been rapidly decreasing. The vast majority of the stores you’ll see on a busy street or
shopping center are retail chain stores. The amount of funding needed to break in the
industry plus the competitive advantage most of these big players contain is proving most
of these independent stores to overcome. The big players are eliminating the
competition with their purchasing power, marketing and efficient supply management
are the leading cause of small businesses shutting down.
 Bargaining Power of Suppliers:LOW- Big business can fully afford to choose
whichever supplier they want to do business with since there are so many options in the
retail industry. Power houses like Wal-Mart make their living by selling items for the
cheapest possible price. The retailers have most of the power in this situation. If the
retailer has a disagreement with the supplier, the retailer can simply choose from many
other suppliers. Often times the only thing keeping a supplier alive is their contract with a
big player in retail.
 Bargaining Power of Buyers: HIGH- Customers have strong bargaining power with
retailers. With customer satisfaction being stressed so much nowadays, each retailer is
looking to distinguish themselves from the crowd with any action possible. Whether it’s
matching the price of cereal to a competitor or giving a free Blu-Ray player with the
purchase of a television, the bargaining power is on the rise in this recession-recovering
economy.
 Availability of Substitutes:HIGH- The competitive atmosphere is forcing every major
retailer to expand its horizons. Department stores are beginning to sell produce while
building restaurants inside of their premises in order to gain any advantage they can
over the competition.
 Competitive Rivalry:HIGH- Retailers are constructing many strategies in hopes of
bringing growth to their respective companies. Loyalty programs, memberships, low-

price wars between competitors are taking place to ensure that that one company earns
the customer’s loyalty.
Apparel stores
The Apparel industry consists of companies that design and vend clothing, footwear and
accessories. Products include undergarments, jackets, shirts, jeans, luxury items, shoes and handbags.
There are apparel companies which are wholesalers, who sale large amounts of products to retailers. The
retailers then raise the prices of the goods and sell the goods to the consumers.
The major players are: Gap, L Brands (Victoria’s Secret, Pink and Bath and Body Works), Ross,
PVH Corp (Calvin Klein, Tommy H., Izod and Speedo), Foot Locker, American Eagle, Abercrombie,
Guess, Express and Finish Line. As the need for expansion occurs, many apparel companies now operate
as wholesalers and retailers. Retail stores are usually more lucrative than wholesalers. Apparel companies
no longer have to worry about selling to wholesalers, now apparel groups can sell the items they
construct. The issue with this is now apparel manufacturers must find store locations, manage their
inventory and avoid big markdowns. With more and more consumers shopping behind their computer
screen, e-commerce is becoming a booming business. With e-commerce, there’s a whole potential new
market overseas. There’s not a big need for fixed assets or retail store employees, which keeps the costs
down. The apparel industry is full of trends. Most importantly, fashion trends change constantly. As long
as product differentiation is occurring, competition levels will lead to growth. Adapting to the want of the
consumer in a quick manner will aid longevity.
Department Stores
Department stores offer a wide range of consumer goods; clothing, furniture, appliances,
cosmetics, sporting goods and hardware. What separates department stores from discount stores are the
prices. Department stores do not use the low-profit margin, high-volume approach. Department store
prices are usually relevantly higher than discount stores, due to many department stores being upscale
stores.
The big players in this industry are: TJX (conglomerate composed of T.J. Maxx, HomeGoods and
Marshalls), Saks, Nordstrom, Sears, JC Penney’s, Macy’s, Kohl’s and Dillard’s. Wal-Mart could be
considered a major player as well, but we will not include Wal-Mart yet again since they are considered a
discount store. The threats that are affecting department stores have to do with the economy. Ever since
the recession that ended in 2009, department stores have taken a huge hit since most of the items they sell
are seen as luxury goods and not necessities. With the average shopper becoming watching their wallet,
the need for luxury goods has vastly diminished. Also, e-commerce is hurting the pocketbook of
department stores. Department stores are projected to take a 1.2% hit in revenue, which has been the
trend for the last five years. Also, customers are shopping online, looking for similar products at the most
affordable price. The growth of the department store industry is the same as the discount store industry.
The direction the economy goes, direction department stores will follow suit.

Chart #4 shows the decline in retail store openings across the industry in the U.S. since
2008. This data consists of the top ten stores which opened retail stores within that year. Every
year the number has dropped dramatically as consumer confidence has dropped. The retail
industry must figure out what will make consumers want to come shopping for anything more
than a bargain in order for this figure to jump back up.
Discount Stores
Discount stores consist of an ample amount of goods; groceries, jewelry, electronics,
appliances. Many of the goods sold by discount stores are name brand and at a lower price than
non-discount store competitor. Many discount stores implement a low-profit-margin, high-volume to
attract consumers who take price into account. This strategy especially worked well for discount stores
during the most recent recession. Discount stores have the biggest presence in developed nations, such as
the U.S., Japan and Europe. The emerging markets for discount stores include Brazil, China and regions
where the middle-class population is growing. The discount store industry is comprised of over 5,000
stores and brings in about $120 billion yearly.
The big players in this industry are: Wal-Mart, Costco, Target, Dollar General, Dollar Tree,
Family Dollar, HSN and Big Lots. The issue in this industry is growth. It is very difficult for this industry
to grow since the typical discount store patrons are bargain hunters. Growth can only be achieved in this
industry by population growth and consumer spending drive demand. With the U.S. labor and housing
market steady improving, U.S. consumer confidence has risen. The reason the big players have
distinguished themselves from the bunch is because they have the upper hand in purchasing power,
distribution and marketing. The efficient supply chain management and very low pricing lead to many
shoppers for each major player.
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2008 2009 2010 2011 2012
Chart #1Decline in retail store openings
(top 10 stores measured)

Drug Stores
The drug store subgroup is comprised of pharmacy stores which sell over-the-counter
medications, prescriptions, cosmetic items, toiletries and general consumer goods. This industry excludes
big-box stores, mail-order retailers, hospitals and clinics.
The three big players in this industry are CVS, Walgreens & Rite-Aid. Of the $248 billion of
revenue brought in by the drug store industry in the U.S., CVS has a market share of 29%, Walgreens
owns 18% of the market while Rite Aid owns just over 1%.Wal-Mart and Costco (30% combined
ownership of drug market) also play pivotal roles in the drug store industry but they conduct themselves
as big-box stores who use pharmaceuticals as a business add-on and do not make the majority of their
revenue from drug sales. Independent drug stores and mail order sales account for the remaining 20% of
the market share. There is major growth in the drug store industry taking place. These drug store giants
are being aggressive in expanding their ownership of the industry, such as Walgreens, who has just
purchased a regional U.S. drug store company. Wal-Mart, CVS and Wal-Mart have just opened hundreds
retail clinics, which are set to assist with the rise of medical coverage under the Affordable Care Act.
These clinics will be able to conduct lab testing of drugs and provide advanced health care services, such
as tracking cholesterol, diabetes and hypertension levels.
Home Improvement
This industry is comprised of companies that aid in the process of home renovation, remodeling
or adding to one’s residence. Building materials and hardware are the popular items purchased at home
improvement stores. Home improvement can extend to lawns, gardens and structures such as gazeboes
and garages. Home improvement companies purchase goods from manufacturers and wholesalers and
sell these same goods to the general public and professional contractors.
The big players in this industry are Home Depot, Lowes and Lumber Liquidators. The top two
companies control most of the market share, mostly due to the high start-up costs to enter the industry
The Leading Indicator of Remodeling Activity (LIRA) predicts that the home improvement market will
see a double digit rise in growth in 2013. As consumers attain disposable income and housing markets are
on the rise, consumers will continue to invest in their homes. The main reason for such optimism is due
to low interest rates on homes. Studies show that 53% of adults have made some sort of home
improvement in the last calendar year and 56% of those adults spend at least $1000. Many house-turners
are purchasing homes and fixing them up to resell. Also, about 50% of the consumers in the remodeling
subgroup are planning to live in their current home for at least six years Remodeling is no longer about
resale value but for the comfort of the consumer. The only threats currently pertaining to this industry
are: homeowners who can’t afford to fix their residences, reluctant banks.

Restaurants
The restaurant sector consists of fast food, full-service dining, casual dining and delivery/food
preparation establishments.
The main players in the restaurant industry are: McDonalds, Starbucks, Yum (conglomerate which
contains Pizza Hut, KFC and Taco Bell), Chipotle, Darden (Olive Garden, Red Lobster, Longhorn
Steakhouse and Yardhouse), Dunkin’ Donuts, Papa Johns and Krispy Kreme.
There are a considerable amount of trends in the restaurant sector. Consumers are beginning to
have a desire for healthier menu options at restaurants. Many restaurant consumers are of older ages that
take their health into consideration. With the trend of healthier foods being consumed in the home,
restaurants are increasing their variety of healthy items on the menu. Awareness of the environment has
become a crucial issue around the globe. The restaurant industry as a whole is aiming to “Green the
industry”. Restaurants are starting to lessen their ecological footprint on the environment by generating
the least amount of waste possible. The Green Restaurant Association is giving restaurants the chance to
go through a certification program. The restaurant industry is looking to fight the threats facing it by
offering more affordable options. The recent recession has led to many consumers to be value conscious
during this post-recession time period, which leads to the cost strategy known as the Dollar Menu. As you
have seen, more and more restaurants are coming out with their respective Dollar Menus. This will
keep customers coming back for cheap, quick eating options. Along with new food choices, there’s been
talk of new methods of customer interaction. A Contact-less payment technology has hit the scene in
recent years. Using technology to place orders for food looks to be growing, judging by the research of
many analysts. Many restaurant retailers believe the global market is the ultimate answer for growth.
Restaurant chains only account for 99% of China’s commercial food sales and 98% for Europe, compared
to 50% for the U.S. The modification by the restaurant industry to keep up with the ever changing
economy is called fast innovation, which is what every industry is trying to accomplish.
As you can see in graph #2, restaurants and discount stores are overtaking the market share in the retail
industry. I believe this is because of the affordability many restaurants and (of course) discount stores are
Apparel
8%
Dept
7%
Disc. Stores
28%
Drug
9%
H.I.
12%
Restaurants
19%
Other 17%
Market Share for Six main industries in
Russell 3000
Apparel
Department Stores
Discount Stores
Drug Stores
Home Improvement
Restaurants
Other
Graph # 2

doing their best to supply their customers in tough economic times. More and more restaurants are
coming out with alternative menu items which cost less for them and their customers, and discount stores
are selling everything in their store for $1 or not much more than that.
Yearly average price of a burger continues to rise. The Big Mac Index, if you will is a good indicator of
where our economy stands due to the high demand for hamburgers in the U.S. Even though the dollar
menu has given customers a cheap option, the prices of the main staple menu items continue to rise. This
is not good for our economy. This is saying that price of food has and most likely will continue to rise.
Issues
Accounting- Generally Accepted Accounting Principles (GAAP) accounting is becoming a
major issue for many retail corporations. With new rules every year, it’s hard for the companies
to keep up with what actually is acceptable. The Financial Accounting Standards Board (FASB)
and the International Accounting Standards Board (IASB), are currently looking into new
leasing accounting standards. The possible change will be that rent will no longer appear on the
income statement and it will be replaced by depreciation and interest charges. With that in mind,
amortization and interest charges are usually the heaviest in the first few years, so the first year
costs of long term assets will show twice the amount of current rent based on GAAP .There are
more issues on the balance sheet. Rules that have been just recently updated concerning lease
obligations and how it will be posted. Future lease obligations will be replaced by asset and
liability accounts on the balance sheet. The asset account will acknowledge the leaser’s right to
use leased property, while the liability account will record the obligation to pay rentals. The new
rules will impact the retail and restaurant industries more than others because they will require
companies to record on their financials the enormous number of leases for the nation's shops and
eateries. The rules will not allow grandfathering of existing leases, will require that lease option
periods be considered and recorded for the longest period more likely than not to occur, and will
even mandate that contingent rents such as percentage rent be estimated and booked.
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Chart #3
Starbucks
Jack
Wendy's
Average price of a burger has risen over last 5 years

Recording these leases will affect traditional financial ratios and metrics such as NOI,
ROI, and EBITDA. For instance, recording all the leases at together at the same time with a
higher initial-year impact on earnings will lower NOI and ROI in the first years after the change.
EBITDA will rise, because the operating-expense rent will be replaced by interest and
amortization. Because new, large asset and liability accounts will cause the balance sheet to rise
unusually high, companies may have to restructure current debt contracts with lenders to avoid
defaulting on payment. For example, contract related to interest-coverage ratios and debt-to-
equity ratios will immediately be affected, so some companies may be out of compliance after
the change from day one.
Along with their impact on finances, the new rules will demand substantially more time
and energy from companies' accounting and finance, real estate, lease administration, IT, and tax
departments. Even after the initial conversion to the rules takes place, there will be continuous
monitoring, estimating, and recordkeeping at each quarter. Independent auditors will need to
spend more time handling the more detailed data required for the many more leases required to
be on the books.
It's estimated that the new rules will be released by summer 2014 summer, with their
effective date unlikely to be before 2013. The FASB/IASB has published two drafts of the rules
since 2009 and received comments on them from hundreds of different organizations and
individuals. These comments range from acceptance to outright rejection and pleas for the status
quo. Previous changes to GAAP standards have been delayed and drastically revised before
being released, so it is difficult to predict when and in what form the final rules will emerge.
Regulatory- Recently, congress called for a mandate that would require the federal government
to blend 18 billion gallons of corn ethanol into gasoline per year. This proposition has since
been appealed by several foodservice organizations, including the National Restaurant
Association (NRA). The NRA believes that adding corn ethanol to gasoline will drive up
food prices all over the world and making us more dependent on oil. This will especially
drive up the price of corn whle bringing down the availability of it. Congress has been trying to
negotiate with the multiple food service organizations battling this proposition. Congress
recently proposed bringing the number of blended gallons of corn ethanol from 18 billion to 15
billion. With food costs already being one third of operating costs for restaurants, food costs are
set to eat into net income even more.
Also, the U.S. Food and Drug Administration (FDA) announced plans to prohibit
partially hydrogenated oils (trans fat) in processed foods. The FDA officially recognized trans-
fat foods as “no longer safe” and an excessive consumption of trans fats could increase risk of
heart disease. Artificial trans fats have been used to extend shelf life and improve food texture
and taste of products. This ban would not affect natural trans fats, which appear in meat and
dairy.

Conclusion:
As the retail industry seems to be struggling to find safe ground in a market where the
cheapest product automatically equals the most desired product. We are currently moving
away from what retail was originally created for, to give value to the customer. Yes many
restaurants have named their dollar menu’s “value menus”, but are they really bringing any value
to the table? As we purchase cheaper products and cheaper food, which is most likely filled with
artificial preservatives. This applies to discount stores as well. Does buying the cheapest vacuum
or most affordable light bulb really bringing savings? Or will we be lining up two weeks later to
make a poor investment in another $1 dud of a shopping cart full of “savings”. But the consumer
doesn’t care since they’re stuck in the consumer minThe retail industry must move back to
giving customer’s not the cheapest products, but products that will last us the longest. For
that two happen, we must be willing to pay that extra dollar for the extra value we receive.
Works Cited
 http://www.ibisworld.com/industry/discount-department-stores.html
 http://retailindustry.about.com/
 http://finance.yahoo.com/news/trends-discount-variety-stores-industry-130000588.html
 http://www.franchising.com/articles/prepare_for_change_new_lease_accounting_rules_to_affect_
retail_restaurant_i.html
 http://www.hoovers.com/industry-facts.drug-stores.1532.html
 http://www.residentiallighting.com/home-improvement-spending-double-digit-growth-2013

Macro Factors
U.S. Oil Prices
The price of crude oil is a strong economic indicator. The typical customer is going to
refrain from making unnecessary purchases during weeks when gas goes up 10 cents a gallon.
When gas prices drop, the consumer is more likely to buy using their disposable income. Gas
prices (per oil barrel) have been steadily rising since the recovery from the recession back in
2009. The factors that drive the oil prices are said to be supply/demand and global political
conflict. The recent events in the Middle East have led to uncertainty in the global economy.
Libya’s oil production has declined immensely due to wages demanded by workers. Oil
production has fallen from 1.6 Million barrels produced daily to 300k barrels produced. One
thousand Iraqi’s were murdered just two months ago (July), which did not help the civil unrest in
this area. Also, because of the uproar in Egypt, the availability of the Suez Canal supply route
has been in question. The lack of production and possibility of pipelines being closed off has
raised the demand for oil, which has led to an 18 month high in oil prices. This could lead to a
decrease in consumer spending if gas prices continue to rise, which is not a good sign for the
retail industry. The retail industry is not an innovative industry and relies on positive macro
factors to survive.
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Oil Barrel Monthly Avg. Price Past 5 Years

Macro Factors
U.S. Unemployment Rate
The unemployment rate in the U.S. continues to fall as the U.S. has not seen 8%
unemployment since August of 2012. Judging from the statistics of economic activity, the
economy is growing. Many are suspicious of the supposed growth of the U.S. economy, citing
that the truth behind the unemployment rate is the fact that since the recession, the labor force
participation rate has decreased from 66.4% to 63.4%. Even though there is a valid reason for
speculation, the proof is in the numbers. Ism.ws reports that the overall economy grew for the
51st
consecutive month. Also, the non-manufacturing sector grew for the 44th
consecutive month,
checking in at 58.6% in August. This is the NMI’s highest rate ever marked since its
commencement back in January of 2008. NMI’s business activity/production industry and New
Order’s industry grew for the 49 consecutive month. Sixteen non-manufacturing industries
reported growth last month, while the only two NM industries reporting contraction is the mining
industry and the arts, recreation & entertainment industry. As for the manufacturing sector, it
checked in at 55.7%, growing for the third month in a row. Many of the indexes in the
manufacturing sector checked in at their third consecutive month in growth. The manufacturing
sector is growing at a slower pace than the NMI, with many sectors citing tight U.S. government
spending as the reason, such as computers & transportation equipment. The great news is that the
only manufacturing industry reporting contraction is miscellaneous manufacturing. The economy
as a whole is showing steady growth. Overseas, Europe’s unemployment has risen in one year’s
time from 11.5% to 12.1%. Even though unemployment has risen in the last year, 33,000 jobs
were added to the economy in June 2013, compared to July 2012, when 1.08 million people lost
their jobs. There are a few countries inflating the numbers for all of Europe. Greece & Spain are
seeing north of 26% unemployment while Austria and Germany are at about 5% unemployment.
6.0
7.0
8.0
9.0
10.0
11.0
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
U.S. Unemployment rate Monthly Chart

Macro Factors
U.S. Retail Sales
U.S. retail revenue increasing only means one thing, consumer confidence is also
increasing. Wages in the U.S. have increased by 2.2% overall since last year, the exchange rate
trade-weight is up to 90.3%, up from 83.9% last year, retail sales are up 4.9%, GDP is up 1.6%
for the quarter, industrial production is up 2.7% & CPI is up 1.5%. Also, retail statistics are
improving for most of the major players in the world, with the only area facing a deficit being
the economically troubled European countries (Spain, Italy, Greece, etc.). Recent studies show
that the U.S. consumers survey statistics have improved. Consumers beliefs that business
conditions are “good” increased to 19.5% while those claiming that jobs are “hard to get”
decreased to a five year low of 32.7%. With the 2013 yearly U.S. retail sales set to approach
$380.69 Billion by the year’s end, it seems that the U.S. economy has responded well to the
questions of many pundits.
U.S. Retail Yearly Sales

Macro Factors
Other Macro Issues
- Inflation: The current rate is 1.5%. The CPI has risen in the last year for food (1.4%)
and fruits/vegetables (1.2%). Many businesses are looking to raise prices above the
inflation rate to generate new revenue.
- Interest rate: U.S homes sales soared to a 6 ½ year high due to interest rates. The 10
year bond is currently at 2.619%. Even though the interest rate has risen 1% since
May, the economy is being resilient in its quest to getting back on track.
- Commodity prices: Many blame China for the rapid commodity price rise. China’s
emerging market and demand for commodities is said to be one of the drivers for the
rising prices.
Conclusion
The U.S. economy has many reasons to be in a slump. The economy does not like
political conflict, the economy does not like inflation, and the economy certainly does not like
rising oil prices. Be that as it may, the economy is improving through all of these distractions. So
much so that the S&P500 rose above 1600 basis points for the first time in history during May of
this year. Even though the economy has plenty of work to do to be in tip top shape, I do not see a
major reason why the U.S. starts heading towards a downturn any time soon. The only negative
that’s worth mentioning is the steady rise of gas prices. The economy continues to grow in the
non-manufacturing sector, which means great things for the retail industry and consumer
confidence is rising. The retail industry is hoping that consumer confidence translates to more
spending as the U.S. economy presses forward.
Sources Cited
http://www.ism.ws/About/MediaRoom/newsreleaselist.cfm?navItemNumber=22333
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unemployment_st
atistics
http://www.economist.com/news/21586901-retail-sales-producer-prices-wages-
and-exchange-rates%20

Paper# 3 Company and SWOT Analysis,
Company Overview
History of Starbucks
Starbucks (SBUX) broke ground in
1971 when history teacher Zev Seigel, English
teacher Jerry Baldwin and writer Gordon
Bowker opened up a coffee shop called
Starbucks Coffee, Tea and Spice in Pikes Place
Market in Seattle with $9,000 in funding. These
three business partners showed favor for exotic
coffees and teas and decided they had a niche
audience in Seattle that shared the same interest.
The name was originally set to be named
Pequod, inspired by the wailing ship in the
novel, Moby Dick. After some disagreement
Pequod, the name was later changed to
Starbucks, the name of the chief mate in the
novel. Seigel, Baldwin and Bowker thought that
the theme of the sea captured the aura of the
seafaring tradition of coffee traders. The
Starbuck’s logo, a two-tailed mermaid from
Greek mythology named Siren encircled by the
name of the store, adds to the nautical theme.
The three business partners followed
their operations after a Dutch immigrant, Alfred
Peet, who owned a small coffee shop in
Berkeley, Ca. Reputation of Peet’s coffee shop
had reached Baldwin, Siegel and Bowker
learned Peet’s roasting procedures and
developed blends and flavors of their own.
Starbucks was an instant success. A second
Starbucks opened in 1972 and by the early
1980’s there were four Starbucks in the Seattle
area with profits growing every year. Howard
Schultz, vice president and GM of U.S.
operation for Hammarplast, a Swedish kitchen
equipment manufacturer, became the head of
Starbucks marketing in 1983. Schultz vigorously
pursued a career with Starbucks, meeting with
the three business partners regularly and sharing
his vision for expanding the company all over
the U.S. and Canada to allow people across the
continent to experience Starbucks. In 1983,
Shultz had plans of implementing the Italian
coffee-shop culture of espressos, cappuccinos
and fresh-brewed coffee to Starbuck’s menu but
but was vehemently denied for two years. In
1985, Schultz left the company to venture out on
his own and start an espresso bar business in
downtown Seattle. Schultz’s espresso company,
II Giornale (pronounced ill jor-nahl-ee) Coffee
Company, became successful. In 1987, Schultz
bought the entire Starbucks Company from the
three owners, combined both of his companies
and changed the name to Starbucks Corporation.
Starbucks made its IPO in June of ’92
and expanded from 500 stores in 1992 to 10,000
by 1999. In 1996, Starbucks opened its first
ever store overseas, in Tokyo. Also, since
Starbucks’ IPO, they’ve expanded through the
selling of licensed stores with Marriott, Aramark
and have partnered with United Airlines to
provide coffee on all United Airline flights,
supplying coffee to over 500 planes and 20
million customers per year on these flights.
Starbucks is now a global roaster,
marketer, and retailer. Starbucks, the largest
coffee shop company in the world, purchases
and roasts their coffee beans then sells them in
well over 20,000 worldwide stores (approx..
9400 co. operated) in 62 countries. Along with
its various types of coffee, Starbucks is also a
retailer of teas, meals, desserts, and coffee mugs.
Though operating primarily through retail,
Starbucks also uses other channels, such as
grocery stores and food service companies,
education, healthcare, hotels, airlines, books,
music and film to expand their brand and
product. All these channels outside of retail are
collectively referred to as “specialty operations”.
The company addreses its business throughout
the globe in four parts: Americas; Europe,
Middle East and Africa (EMEA; China/Asia
Pacific (CAP); and Channel Development.
Starbucks attracts customer loyalty through
loyalty programs such as providing free Wi-Fi
and the Starbucks Card, a rewards points system
that benefits customers with free Starbucks
drinks and drink add-ins depending on the
volume that a customer purchases. Ever since
Schultz’s takeover as the CEO, Starbucks has
expanded exponentially, opening 150 stores
before going public and averaging two new store
openings per day since then ’87.

Business Overview
Starbucks contains three operating
segments, which each segment indicating a
percentage of total net sales for the fiscal year.
1. Americas
2. EMEA
3. CAP
4. Channel Development
 America’s is comprised of retail store
sales the U.S., Canada and Latin
America
 EMEA is comprised of retail store sales
in Europe, the Middle East and Africa
(EMEA)
 CAP contains retail store sales in China/
Asia Pacific (CAP)
 The Channel Development segment
consists of packaged coffee and tea as
well as Starbucks products sold
worldwide through grocery stores and
wholesale clubs, and operate through
joint ventures and licensing
arrangements with large corporation
business partners. This model leverages
the business partners’ existing
infrastructures which cause the Channel
Development segment to attain
relatively lower revenues, an affordable
cost structure, and a higher operating
margin when compared to the other
three reporting segments, which are
mostly retail stores.
The total revenue per segment shows
that Starbucks is still making most of its revenue
in the U.S., where over half of all stores are
located. Starbucks plans to open 3,000 stores in
the next five years and half of these stores are
planning to be opened overseas, so there is vast
opportunity for the overseas segment
percentages to rise tremendously.
Major Segment Trends
Out of any segment, the U.S. contains
the most company owned stores, which means
that many of the overseas stores are being
licensed. This is great news for expanding to
new markets, as Starbucks is allowing for
outsiders to expand the company name as they
sell franchises across international borders.
75%
9%
5%
10%
1%
Americas
EMEA
CAP
Channel
Development
Other
% of Total Net Revenue for SBUX Per
Segment In 2012
Source: SBUX
0% 50% 100%
Americas
EMEA
CAP
Co.-Operated
Stores
Licensed
Stores
% Of Co.
Operated
stores vs
Chart #1
Chart #2

In regards to Chart #1, the Americas
(75% of total revenue) and EMEA (9%)
performs on accord with their share of the retail
stores. CAP, on the other hand, underperforms
as they account for only 5% of Starbucks’
revenue and contain 18% of the Starbucks retail
stores.
Starbucks main products
As you can see from Chart #4, Starbucks’ main
selling point are the:
 Drinks (coffee, cappuccino,
Frappuccino & teas).
 Food (sandwiches, desserts & pastries)
 Pre-roasted coffee bags in bulk cans
and in single small cups
 Coffee machines, coffee-cups and
plastic cups with lids (tumblers)
Rivalry within Starbucks main
competitors
This chart shows Starbucks’ market
share when compared with its direct
competitors. While McDonalds’ main product is
not coffee, they are expanding their menu to
compete with Starbucks so McDonalds must be
included in the discussion. Dunkin’ Donuts is
the only other public company that is almost
identical to Starbucks. They operate out of retail
stores mainly, but they concentrate on donuts
and pastries rather than high quality, exotic
coffee. Nestle is a coffee giant, selling their
products through supermarkets and retail stores
and giving themselves a 70% market share of
the coffee industry in the U.K., and 50%
globally. Starbucks, checks in at 42% global
market share and a 32% U.S. market share in the
coffee house segment.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Licensed
Stores
Co.-Operated
Stores
# of Co.-
Operated
Stores vs
Licensed
Stores
0%
10%
20%
30%
40%
50%
60%
70%
80%
2010 2011 2012
Beverages
Food
Packaged & Single
Serve Coffees
Coffee-making
equipment and
other merch.
% of Rev. by
Main Products
per Year
15% 1%
58%
25% Starbucks
Dunkin' Donuts
Nestle
McDonalds
Size Market
Share vs Direct
Competitors
Chart #3
Chart #4
Chart #5

Overseas Revenues
Profits are growing every year in every
segment. Even though sales overseas have not
been ideal, things are looking positive,
especially with 1500 new stores looking to be
opened within the next five years.
Culture
The Starbucks likes to describe itself as
easy-going. The atmosphere sets the tone for
what Starbucks wants their customers to
experience. The first thing management wants
their customer to smell is the scent of their fresh
brewed coffee, then hear the sounds of their
music and listen to the expertise that each and
every barista about every item on the menu.
Management welcomes people to visit Starbucks
who plan to sit down and catch up over a cup of
coffee or students who want to visit Starbucks
for some peace and quiet time and studying. As
for the employees, Starbucks wants the
employees to feel empowered at their job.
Schultz has a vision that explains that if the
employee is treated right by management, then
the customer will be treated right by the
employee. The employee should own their job.
Primary Company Risk
 One main risk that Starbucks faces is the
risk of non-delivery of sufficient
milk/coffee beansto support the
company’s retail stores.
 Low customer traffic or low average
value per transaction, which negatively
impacts comparable retail store sales.
 Competition: Customers trading down
to lower priced products within
Starbucks or choosing another company
 Customers not accepting new products
or customers not accepting new price
increases needed to cover ever
increasing costs.
 Negative economic conditions that
affect consumer spending
 Declines in consumer demand for
specialty coffee products
 Impact from negative publicity
regarding business practices/health
effects of Starbucks
 Labor costs such as health care,
minimum wage levels
 Construction costs of new stores
 Material interruption in supply
chain/distribution channels beyond
Starbucks’ control, maybe due to
extraordinary circumstances such as
war, terrorism, boycotts, etc.
 Lowering of credit ratings. This could
limit the availability of financing and
could also increase the cost of debt for
Starbucks.
SWOT Analysis
Strengths- 32% market share of the Coffee
house segment globally and 42% of the market
share of Coffee in the U.S. Also, Starbucks is
expanding their brand with plans to open
thousands of stores in the U.S. and overseas in
the near future. Starbucks has developed a brand
globally and is a fixture in the retail restaurant
industry.
Weaknesses- Due to the ever changing
economy and direct contact with customers,
Starbucks feels the initial effect of rising food
and commodity prices and Starbucks has to
0
2000
4000
6000
8000
10000
2010
2011
2012
Yearly Profits per
Segment (In $ Millions)
Chart #6

adjust for those changes. Starbucks either
chooses to charge the customer a higher price or
takes the loss if a significant amount of
customers complain about the higher prices.
Starbucks heavily relies on their shipment routes
overseas for their exotic blends of coffee, which
could easily be put to a halt if extraordinary
situations arise (war, tariffs, and health issues
with coffee beans). Also, other
Opportunities- Starbucks has a great
opportunity to expand their business overseas.
Their profits have been lukewarm overseas to
say the least, but steady growth is showing in
their earnings reports over the last three years.
With a strong management and marketing team
figuring out what exactly customers in specific
regions want, Starbucks is looking to grow their
profits and customer satisfaction. Starbucks
virtually has no other coffee giant expanding
overseas with retail stores. Nestle is the only
coffee oriented company larger than Starbucks,
but they do not operate as a retail store.
McDonalds offers some blends of coffee, but
they do not contain the exotic blends that has
built Starbucks’ brand. McDonalds is also food
oriented. So there is a lack of competition in that
regard.
Trends- Starbucks is expanding overseas as is
their profits. Schultz, CEO, has had a vision
since day 1 to expand the brand and profits so
everyone can attain the “Starbucks experience”.
Competitive rivalry seems to be growing as
Starbucks is putting a heavy focus on breakfast
food to compete with other retail restaurant
giants such as McDonalds. Starbucks is also
yielding to the customer that are asking for
healthier food and drink options.
Management
-Howard Schultz: CEO
Schultz joined Starbucks in 1985 as
head of Marketing. Left Starbucks in 1987 and
later purchased Starbucks after succeeding in his
own business. Schultz has been the CEO for the
last 20+ years.
-Troy Alstead: CFO
Alstead has served as the CFO of
Starbucks for the last five years. Also, Alstead is
the Chief Accounting Officer. He recently
became the Group President of the Global
Business Services of Starbucks. Alstead has also
serves as Executive VP and Chief
Administrative Officer.
-Clifford Burrows: Group President of Americas
and EMEA
Burrows has served as the Group
President of Americas, EMEA and Teavana at
Starbucks since May of this year. Burrows also
served as the President of the Americas segment
for two years and GM of Starbucks in the U.K.
-John Culver: Group President of CAP and
Channel Development
Culver is the Group President of the
CAP and Channel Development segments and
Emerging Brands at Starbucks. Culver also
served as the President of Starbucks in the CAP
segment for two years.
Final Conclusion
Starbucks is growing its brand, but not
at the speed they would like. Numbers show that
Starbucks should have more of an imprint
overseas than they do now since they are the
only coffee based retail giant expanding, but
Nestle seems to have a strong lock on certain
markets overseas, such as the U.K. Starbucks’
profits are growing overseas and their overseas
profit % are growing in regards to the Americas
segment. Starbucks looks to be moving in the
right direction as they plan to press even harder
to expand their brand globally.

Bibliography
 http://www.mhhe.com/business/mana
gement/thompson/11e/case/starbucks-
2.html
 http://gourmet-coffee-
zone.com/starbucks-history.html
 http://investing.businessweek.com/res
earch/stocks/people/people.asp?ticker
=SBUX
 http://finance.yahoo.com/q/in?s=SBUX
+Industry
 http://money.cnn.com/2012/12/05/ne
ws/companies/starbucks-new-
stores/index.html
 http://www.nasdaq.com/article/chinas-
coffee-hit-starbucks-and-nestle-
dominate-but-the-market-is-still-
growing-cm259370

Marron, Steven TR 7:30-8:45PM
Paper #4- Short & Long Term Viability
Company Fundamentals (Ratio Analysis)
For the fundamental analysis of Starbucks Corp, we will analyze Starbucks’s liquidity
and solvency to determine the company’s short term viability. Also, we will use top and bottom
line growth to determine the long-term viability of Starbucks. We will analyze Starbucks’s
financials in comparison with Nestle (NSRGY), McDonalds (MCD), Panera Bread (PNRA),
Dunkin’ Donuts (DNKN) and Domino’s Pizza (DPZ).
- Short Term Viability
We will find out through graphs how liquid Starbucks really is compared to its industry
peers.
CFO vs. EBIT
The Earnings Before Interest and Taxes (EBIT) has been growing at a compounded
annual growth rate (CAGR) of 15.77% since 2008, while Starbucks’s Cash From Operations
(CFO) has been growing at – 3.86%. EBIT has been steadily rising with net income almost
tripling from 2009 to 2010 ($390M to $945M) and now checking in at over $1 Billion for the
past two years. The reason for the negative CFO% definitely has to do with the 2008-2009
economic downturns. In 2009, Starbucks saw a 10% decrease in sales and a $68.2 Million
decrease in accounts payable. This might be due to the fact that Starbucks expansion also fell.
The plan before the economic crisis was to open 200 stores in 2009, but that number was
0
500
1000
1500
2000
2500
3000
3500
2008 2009 2010 2011 2012
CFO
EBIT
CFO vs EBIT in $ Millions
Chart # 1

shortened to 140 after the recession hit. Also, Howard Schultz called for the shutdown of 300
underperforming stores worldwide, which led to over 6,000 job cuts at the company during 2009.
This put even more of a dent in the company wide cash flow figures. In 2011 and 2012 CFO took
another dip due to inventories being well up over $1 Billion and accounts payable falling $142
Million in 2012.
Net Working Capital Requirement (NWCR)
The high amount for NWCR has to be attributed to the decrease in current
liabilities in 2009. Starbucks current liabilities fell $600 Million in 2009 but Starbucks registered
a surplus in the following years after, hence a relevant drop off. Another big reason for the drop
off in the latter two years would be the lack of growth in cash. From 2009-2010, Starbucks
increased cash by over $810 Million, while only increasing cash by $30 Million in the ladder two
years combined. This is mostly due to Starbucks paying $0 in dividends in 2009, only $190
Million in 2010 but then paying over $900 Million combined from 2011-2012. Starbucks also
repurchased $1.1 Billion of its own stock from 2011-2012.
200
400
600
800
1000
2009 2010 2011 2012
NCWR per year in $Millions
NCWR
Chart #2

Free Cash Flows (FCF)
Starbucks looks to have gone along with the industry trend except for 2009, when its FCF
actually rose while most of the industry’s FCF’s fell. This can be attributed to Starbucks not
paying dividends in 2009, which led to Starbucks retaining capital that it would’ve paid out to
investors if it were not for the uneasiness the market caused back in 2009. The reason for
Nestlé’s sky rocketing and pummeling FCF is due to Nestle issuing over $7.5 Billion of long
term debt during 2008-2009 while issuing only $2 Billion from 2010-2011 due to the economic
recovery. Also, net operating cash flow hit a 5 year high back in 2009 with $17.93 Billion (hasn’t
been this high since). Nestlé’s net investing cash flow was also positive in 2008 as Nestle sold
$11 Billion of its assets. There wasn’t anything out of the ordinary relating to Starbucks that took
place during the recession. Judging from Chart #3, Starbucks’s FCF responded well to the
downturn.
-1000
0
1000
2000
3000
4000
5000
6000
2008 2009 2010 2011 2012
Starbucks
McDonalds
Dunkin
Nestle
Panera
Dominos
Linear (Nestle)
Trend line
Starbucks
Free Cash Flows vs. Industry in $Millions
Chart # 3

TIE (Times Interest Earned)
TIE shows that Starbucks is well ahead of the industry average when it comes to being
able to pay their interest earned several times over. This is due to Starbucks’s interest owed on
short term and long term debt staying at a minimal figure. Starbucks has been paying an average
of $32 Million in interest expenses over the last five years. While their interest expense has been
increasing by $10 Million per year, SBUX’s EBIT has been increasing by an average of $330
Million per year, which is causing the TIE to rise astronomically. As for Panera Bread, their TIE
is in the 300’s as they’ve incurred practically no short term and long term debt. Their interest
payable average is $1 million per year. This graph is an indicator that Starbucks is in good shape
financially. They are efficient in not having to incur debt when taking on capital expenditures.
This company is far from being capable of defaulting.
Debt To Equity
As we can see from Chart #5, The Starbucks Debt to Equity ratio is about equal with the
industry average. A reasonably low D to E ratio illustrates that SBUX is relying mostly on equity
0
10
20
30
40
50
60
70
80
2008 2009 2010 2011 2012
Panera
INDUSTRY AVG
Starbucks
Times Interest Earned vs. Industry
-1
0
1
2
3
1 2 3 4 5
industry avg
DNKN
SBUX
Debt To Equity vs. Industry
Chart #4
Chart #5

financing to expand its brand around the world. Since the end of 2009, this Seattle based
company has not taken out a dime of short term loans, while equity has been rising at an average
of $700 Million per year, which is wonderful news for stockholders.
Financial Leverage
Starbucks’s financial leverage is above par when considering its competitors. Starbucks’s
has a large amount of fixed assets in the books. With over 20,000 stores you can expect any
company to have more assets than equity. Dunkin Donuts has financial leverage of over 10. This
can be viewed as a negative. As Dunkin Donuts contains way more fixed assets than cash on
hand. Stockholders might want to see this ratio lowered and Equity raised.
Inventory Turnover.
Starbucks is below the industry average in Inventory Turnover. Starbucks cant seem to
get rid of its old inventory as efficiently as the rest of the restaurant industry. Starbucks has an
inventory turnover of about 10 while McDonalds, the fast food giant, turns their inventory
0
1
2
3
2008 2009 2010 2011 2012
Industry Avg
DNKN
SBUX
Financial Leverage vs. Industry
0
50
100
150
200
250
2008 209 2010 2011 2012
SBUX
MCD
industry average
Inventory Turnover vs. Industry
Chart # 6
Chart #7

around about 220 times per year, which almost every day. This could be due to Starbucks buying
their beans in very large quantities to hedge against the uncertainty of their trade channels. One
of Starbucks’s main risks involves their dependence on overseas bean growers and shippers.
McDonalds on the other hand, has their suppliers right here in the U.S. and can get new
inventory delivered expeditiously.
Corporate Credit Ratings
The S&P has rated Starbucks with an “A” for long term. The S&P views Starbucks with
a strong capacity to meet its financial goals, but the S&P views Starbucks as cyclical. Whatever
happens in the economy, good or bad, will directly affect Starbucks’s business operations. For
short term, Standard & Poors have scored Starbucks with an “AA”, which is just a notch below
the best rating possible. Starbuck’s is viewed as very high quality and an extremely low credit
risk for the near future.
Moody’s has marked Starbucks at a “Baa”. Meaning Starbucks is a medium-grade risk
and there might be something suspect about Starbucks in the long term. For the short term,
Starbucks was given a “P-3” rating. Starbucks is viewed as having an acceptable ability to pay
back short-term debt. Moody’s does not seem to have a favorable view when concerning
Starbucks. This might also be due to the fact that Starbucks is very cyclical to the market. Also,
Moody’s might be taking into account that Starbucks has recently hinted at adding $750 Million
of debt to their $550 Million of bonds payable. Even though Starbucks is rated fairly low, they
still have a safer Debt to Equity ratio than 90% of S&P companies.
- Long Term Viability
We will look at how viable Starbucks is in the long term perspective
. Asset Turnover
0
1
2
3
4
2008 2009 2010 2011 2012
SBX
DPZ
INDUSTRY AVG
ATO vs Industry
Chart #8

As we can see from Chart #8, Starbucks is being very efficient in growing revenue in
proportion to sales. This can be attributed to the high volume of product they sell daily. Also,
another reason for this positive figure is Starbucks not needing a big box store in order to
conduct business. Starbucks conducts business rather well using just a small block of space.
Dominos has long been the most efficient pizza maker in the company. They’ve long sold $5
pizzas and have been profitable due to their modest spending ways when it comes to ingredients
and store size.
Gross Margin
Starbucks profit margins are in the same realm with its competitors. Starbucks and the
industry are averaging about 57% gross margin. For every dollar Starbucks makes in sales, it is
keeping more than half of that amount. The reason for the slight downturn in 2012 is the increase
in COGS. COGS rose $680 Million for Starbucks in 2012. Here is one instance of Starbucks
displaying its accordance with the economy.
True Growth
55
56
57
58
59
1 2 3 4 5
Industry Average
SBUX
Gross Margin % vs. Industry
2008 2009 2010 2011 2012
0
0.05
0.1
0.15
0.2
0.25
2008 2009 2010 2011 2012
Industry Average
SBUX
ATO * Margin vs. Industry
Chart # 9
Chart # 10

This is viewed by many as the most important number in finance. ATO times Margin is
viewed by many as what a company’s true growth really is. As we see here, Starbucks is right on
line with its industry but falls just a tad below. I attribute this to the ever rising costs of milk,
beans and food. As we’ve been experiencing for most of the last two years, the prices of raw
materials and food is rising along with inflation. While the other companies in this industry also
are facing higher costs, Starbucks might be getting hit a tad harder due to the high quality of food
products it purchases to sell to its customers.
Return on Equity (ROE)
The lack of ROE is mostly due to the low number of true growth Starbucks has attained
within the last five years. Starbucks is investing its money in new stores. You might recall the
supposed news of Starbucks planning to take out a $750 Million bond in order to finance new
stores around the world, even though they have $1.2 Billion in cash sitting in their bank account.
Panera has an ROE well above 30, mostly due to its absence from short and long term
borrowing.
0
5
10
15
20
25
2008 2009 2010 2011 2012
Panera
INDUSTRY AVG
Starbucks
Return On Equity (ROE) vs. Industry
Chart #11

Return on Assets (ROA)
Starbucks has battled its way to outperforming the market in ROA. The 2009 shut down
of over 200 stores and firing of 6,700 employees as much needed in order to bring this number
where it needs to be. Now with net income on a vast rise and more stores to come, this number
looks to steadily rise in the near future.
Final Conclusion on Liquidity, Solvency and Long Term Growth
Starbucks short and long term prospects are very encouraging due to its increased net
income within the last couple of years. While SBUX doesn’t get rid of its inventory as quickly as
its completion, they beat the industry in almost every other category shown. The most impressive
figures I believe are the doubling in cash from 2009 to now and net income almost quadrupling
from 2009 to the present. They’re seeing more profits per asset than the industry average, as well
as being in good financial condition when referring to going bankrupt. The credit ratings may
or may not agree with Starbucks’s position financially depending on who you ask, but to the
industry’s eyes, Starbucks seems more liquid than most and management is sure to aim to
increase its margins and asset turnover in hopes of outperforming the retail restaurant industry in
true growth.
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2008 2009 2010 2011 2012
INDUSTRY AVG
Starbucks
ROA vs. Industry
Chart #12

Discount Rate Determination
Valuation Analysis
In this paper, I will be conducting a
valuation analysis for Starbucks. I will be using the
Capital Asset Pricing Model (CAPM) in order to
determine the required rate of return for potential
owners of this stock. The CAPM model accounts for
the time value of money and the stock’s sensitivity to
market risk.
Capital Asset Pricing Model (CAPM)
� = � + � ∗ ��
� = expected return of a stock
� = risk-free rate
� = stock’s relative sensitivity to the mkt (beta)
�� = mkt risk premium
Risk Free Rate (rf)
The time value of money is represented by
the risk-free rate (rf) and the rf shows the
compensation expected by investors for an
investment that contains the lowest risk possible.
Since U.S. T-bills carry no risk, many use the 10 year
Treasury bond. The risk free rate used to be just the
10 year Treasury bond. But since the economic crash
of 2008, many believe the risk free rate is calculated
by taking the current 10 year Treasury bond (2.62%)
and adding on inflation (1.2%). This theory brings
our rf to 3.82%. Although, I do not agree with this
theory. With inflation changing daily, I choose to
select the normalized risk free rate of 4%, no matter
the change in the 10 year Treasury bond or inflation.
The normalized rate consists of a 2% real interest rate
and a 2% inflation rate. I believe that a locked in risk
free rate of 4% best represents the overall long term
market assumptions.
Beta (b)
Beta is the relative systematic risk of a stock
compared to the S&P 500. More specifically, Beta
measures the returns of a stock to the returns of the
S&P 500 over a selected period. Beta is known to be
very sensitive to systematic risk (inflation, GDP,
unemployment). Beta is not just a number you can
pull from Yahoo Finance. I will calculate the Beta
shortly. Although, I would expect Starbuck’s beta to
be around 1, since this company is directly affected
by the economy whether it’s price changes in
perishables or issues with consumer spending.
Market Risk Premium (MRP)
This is one of the most important numbers in
finance. The market risk premium is calculated by
taking the expected return of the market (rm) minus
the rf. The difference, which equals the mrp, is the
return of the stock over the rf. This “difference” is
the extra return that investors look forward to when
investing in something rather than putting those funds
in a treasury or letting the funds sit in the bank. As
the mrp rises, so does the risk in the stock. I will
calculate the market risk premium shortly.
We will analyze four factors to determine the beta of
Starbucks.
1. Revenue sensitivity
2. Financial leverage
3. Operating leverage
4. Historical trends
Revenue sensitivity
Chart #1 implies that Starbucks is way more
volatile than the market. Starbucks expanded at an
average of 1300 stores per year from 1999 to 2006.
Even though more people were being reached by this
coffee giant ever year, this did not lead to Starbucks
outperforming their growth % year in and year out.
Revenues still grew, but growth percentages did not
grow in a linear sense. Meanwhile, the GDP
remained at a steady growth at an average of 2%
during 199-2006. From 2007-2009, the housing crisis
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Revenue Sensitivity: Revenue
Growth % for Starbucks falls
sharply during 2008 crisis, but has
outperformed GDP since the
recovery.
___ SBUX
___ U.S. GDP
Chart #1

led to a an average drop in revenue of -10% per year,
while U.S. GDP fell at about only -2.5% per year.
Since the recovery in 2009, Starbucks has rebounded
with an average growth of 11% per year while U.S.
GDP has grown at 1.8% per year.
Financial Leverage
Starbucks’s debt to equity has decreased
every year since it recorded an all-time debt to equity
high of 135% in 2007. The D to E ratio has regressed
down below 1 in 2009. Then down to 61% in 2012.
This low ratio seemed to be targeted by management,
after concerns of such a high ratio were most likely
discussed amongst stockholders. When using CAGR
calculations, total debt CAGR only grew by 4.68%
from 2010-2012, while total equity CAGR grew by
11.62%, a CAGR Debt to Equity ratio of 40%. The
financial leverage has been significally below the
Debt to Equity ratio of 1, which pertains to riskier
companies.
Operating Leverage
As we can see from chart #2, Starbucks
looks to carry a relatively low fixed and variable
costs. Most of its expenses being from coffee, milk,
and other perishable goods. We have learned from
this chart that a 10% rise in revenues will lead to a
36.4% rise in EBIT.
Starbucks has an outstanding operating
leverage, but it still has room for improvement if the
Seattle based coffee juggernaut wants to top the likes
of Nestle. Starbucks plans to keep their operating
leverage low by keeping their stores small in square
footage and wages barely above minimum wage.
With Starbucks being in the retail restaurant industry,
costs are prevalently low, as long as no sudden
changes take place in the economy.
Historical Trends
History shows that since Starbuck’s IPO, it
has proved to be more erratic than the S&P 500 when
it comes to changing price. This analysis was done w/
weekly price changes from the daily adjust price of
the stock compared to the daily adjusted price of the
y = 3.6394x + 5515.8
R² = 0.6726
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Does SBUX contain high fixed &
variable costs?
EBIT vs Revenue Regression
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sbux Nestle MCD dunkn
Operating leverage vs. peers
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01.11.1995
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01.11.2001
01.11.2003
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01.11.2007
01.11.2009
01.11.2011
01.11.2013
3 Year Rolling Beta of SBUX:
Starbucks's beta is more volatile than
the S&P.
Chart #2
Chart # 3
Chart #4

S&P. My prediction was very close, as I did indeed
predict the beta to be very close to one, plus with
Starbucks aligning itself in the gourmet coffee crowd,
this extravegant good might be one of the first items
consumers cut back on when the economy takes a
downturn.
Market Risk Premium
Let me say this once more, the market risk
premium is one of the most important #’s in finance,
if not the most important figure. Aswath Damodaran,
Department Head of Finance at the prestigous New
York University (NYU), who predicted Apple’s
prominent rise and Facebook’s rapid fall, believes
that a rise in mrp is cause by:
 Risk aversion: The mrp should increase as
the risk increases
 Uncertainty about economic growth
 Inflation
 Lack of reliability of info from firms
 Fear of catastrophe
The market risk premium can be meaured in three
ways, says Damodaran.
Surveys- One may ask professors and analysts on
what percentage of profits they think stocks will
bring in and use those hunches to figure out a risk
free rate and market risk premium. Most portfolio
managers hope to make 4.08% more than the risk
free rate. Although, this touches more on wishful
thinking than actual expectations.
Historical Premium- Using this method, one would
co pare hat they ould’ e ear ed i esti g o er
i stocks to ha tthey ould’ e ade i esti g i
risk-free investments. From 1928-2011, stocks
earned an annual compounded return of 9.23%
while T-bills earned just 5.13%. Using this method,
the mrp would be 4.1%. I do not agree with this
method, as I feel that I would be using numbers from
50 years ago as a crutch rather than insight. There
were many groundbreaking things that occurred in
those times. Expansion of electricity, air condition &
airplanes. Do we have anything of that nature that
will be released to the public soon? Also, there were
world wars. Are there any possible political conflicts
on the horizon?
Implied Premium- In this theory, you estimate what
you believe you will earn and compare that to what
T-bills are expected to pay out. I will be using this
approach. With my expected market return being 8%
and my risk free rate being 4%, that makes my
market risk premium also 4%.
Scenarios Best Base Worst
Rf 4% 4% 4%
MRP 0.04 0.04 4%
B 0.8 1.12 1.44
Ke 7.20% 8.48% 9.76%
Final Conclusion
The reason why I picked these growth rates is
because I believe that Starbucks has been moving
very volatile lately, though on the upswing. Applying
the CAPM model, I see Starbuck’s needing to yield a
8.48% return in its current going rate. It is going to be
tough to predict how the market will react to
Starbucks’s plans to opening up 5,000 stores in the
next three years with the CEO possibly taking out a
$1 Billion loan in order to pay for the expansion.
Moody’s has put Starbucks in a bad light with their
lukewarm Baa2 (long term) & P3 (short term) credit
rating of the coffee giant. . Investors will be acting
risk averse if they plan on investing on this company
going forward. On the plus side, Starbucks has
outperformed GDP with earnings and is one of the
leaders in operating leverage vs. its peers, low debt to
equity ratio and massive plans for expansion on the
rise.

Growth Rate Determination and Valuation Coverage
Growth Rates & Valuation
I will be analyzing Starbucks using four valuation
models. Also, I will be choosing a short-term and
long-term growth rate for Starbucks.
 Capitalized Earnings
 Constant Growth Dividend Discount Model
 H Model
 Quantitative Valuation Model
Short Term Growth
For determining the short term growth, I
took a look at the EPS CAGR growth over the last 10
Years for Starbucks. Over this time period, the
CAGR growth% was 20.5%, with the only year with
anti-growth being 2008 (-51%). I of course attribute
the fall in ’08 due to the economic collapse.
Starbucks then rebounded strong with 21% in 2009
and 132% in 2010. As for real growth (Asset
Turnover * Net margin), it checks in at 4.03% CAGR
over the last 10 years. After considering these
figures, I will use a Short term growth rate of 10%
going forward. As I made this assumption, I kept in
mind Starbucks’ master plan to open 5,000 stores
globally in the next three years, which will lead to
greater growth in the short and long run. Also, coffee
fell to its lowest point in more than four years as dry
weather helps improve growing conditions in Brazil,
the world’s largest producer and exporter of coffee
beans. Output will look to boost going forward.
Global production is also set to exceed demand for a
fourth consecutive season, bringing inventories to a
five year high. This will cut costs for Starbucks as
coffee futures fell 22% in 2013, the third largest drop
amongst commodities measured by the S&P GSCI
Spot Index.
Long Term Growth
For long term growth, I will be using the
expected Nominal GDP growth. The nominal GDP
is comprised of Productivity (2%) + Labor growth
(1%) + inflation (2%) = 5%. I will be using 5% long
term growth rate for the economy’s current
conditions.
Capitalized Earnings
Developed by Professor Sweet, the
Capitalized Earnings Model assumes a company pays
out all earnings, which limits its growth to inflation.
The stock price is calculated as follows:
�0 =
��0 ∗ 1 + � ��
�� − � ��
 P0 = today’s stock price
 EPS0 = today’s earnings per share
 Ke = discount rate
EPS0 = $2.26 Bear Base Bull
Ke 9.76% 8.48% 7.20%
Inflation
Assumption 1.50% 2.0% 2.5%
Price $27.77 $35.57 $49.29
52 week
Low/current/High $47.95 $80.99 $81.99
As we can see from the table above, the
target price for this model projects that Starbucks is
trading too expensive for the Capitalized Earning
Model’s liking in every scenario. The flaw in this
model is that it assumes that Starbucks is paying all
of its earnings in dividends and not sitting on cash,
when in fact, Starbucks is sitting on $1.18 Billion in
cash and cash equivalents. Starbucks’s 35:1 P/E ratio
gives Starbucks a brutal valuation for this model.
Gordon Growth (Div. Discount) Model
The Gordon Growth Model aka the
Dividend Discount Model (DDM) goes along with
the theory that the price of the stock will be equal to
the value of the future dividend discounted to present
value. This model only works for stocks which pay
dividends, which Starbucks indeed does pay
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2004
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2008
2009
2010
2011
2012
2013
Last 10 years EPS for SBUX: EPS has
grown at an avg of 20.5% over 10 years.
Chart # 25

dividends. This model has been criticized for
assuming only one growth rate along a large period
of time, which is never the case. We’ll be using the
long term growth of 5% that I chose earlier on.
EPS0EPS0 = $2.2626
Stock price = (Div0 * (1+LTg) / (Ke-LTg)
Div0 = $1.04 Bear Base Bull
Ke 9.76% 8.48% 7.20%
LT Growth 4% 5% 6%
Price $18.78 $31.38 $91.87
52 week
Low/current/High $47.95 $80.99 $81.99
The DDM model used 4 to 6% LT Growth
to reflect the prospective long term growth of the
economy. For the bear and base scenarios, Starbucks
is supposedly trading extremely expensive, similar to
the Capitalized Earnings Model. As for the bull
scenario, the prospective price in a flourishing
economy actually outperforms the current trading
price for Starbucks. The floor looks to be very low
and the ceiling seems to be not very far off the
current price for Starbucks ($80.99). Although the
DDM yields one favorable income, the fact that two
out of the three scenarios are negative is a bad
indicator, which neglects a potential buy of Starbucks
for anyone using this model. The discount rates
truely
H-Model
The H model uses two different growth rates
to value a stock, different from the DDM, which uses
only one. The short-term growth is the expected high
growth companies tend to be exposed in the short
period of time. The long-term growth is implemented
because sooner or later companies will not grow as
effectively and companies will more than likely begin
growing at the same pace as the economy.
�0 =
��0 ∗ 1 + � + ��0 ∗ � ∗ � − �
�� − �
Bear Base Bull
Beta 1.44 1.12 0.8
Ke 9.76% 8.48% 7.20%
ST Growth 8.00% 10.00% 12.00%
H 3.50% 5.00% 7.00%
LT Growth 4.00% 5.00% 6.00%
Price $18.80 $31.45 $92.23
52 Wk low/cur/high $47.95 $80.99 $81.99
Very similar to the DDM, the H Model’s
only positive scenario can be seen in the Bullish
scenario. The bear and base scenarios, again, advise
us that Starbucks is trading way too expensive than
what the H Model values this stock.
Recommendation: AVOID
$-
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Cap. Earnings
DDM
H Model
52 Week
Linear (Current
Price)
Current
Price
Valued prices of SBUX
from 3 Models
Chart #26

Final Conclusion
Looking at Chart #26, we can see that the
downside has a greater chance of occurring (84%
probability) than the upside (16% probability). With
the price of Starbucks already being so close to the
ceiling and the floor having such a great chance of
happening when judging by the Capitalized Earnings
Model, DDM and H Model, we have no choice but to
avoid Starbucks even though Starbucks seemed to be
a solid buy judging from its growth prospects for the
near future. Also, Starbucks’s times interest earned,
debt to equity, financial leverage and asset turnover
blew the competition out of the water. One major
flaw Starbucks did contain was its true growth
(ATO*Net Margin), which was below the true
growth of Starbucks’s competitors. Starbucks follows
the trends of the economy almost to the tee. When
GDP tanked back in 2009 about -2%, Starbucks fell
to -5% anti-growth. When the economy rose in 2010
to 2% growth, Starbucks rose up to 12%. Starbucks
follows the economy and even goes to the further
extreme more than the average investor’s liking. I
feel strongly that in order for one to choose to invest
in Starbucks, that person must be willing to take on a
substantial amount of risk in order to reap the
smallest financial reward.

Relative Value and Regression Analysis
Relative Valuation & Technical Analysis
We will take a look into relative valuation
using historical relative value ratios vs.:
 Peers
 Industry
 Market
In addition, we will be using the following ratios to
calculate whether Starbucks is indeed over or
undervalued:
 P/E
 PEG
 Implied Growth
 PSR
 PBR
 PCFR
 PBR vs. ROE
 PBR vs. ROIC
 EV/EBITDA
 EV/SALES
Price Multiples
I will analyze whether Starbucks is currently
trading cheap (less than its competitor, industry or the
market) or expensive (more than its competitor,
industry or the market).
I will be comparing Starbucks against itself
for historical purposes, the Restaurant industry
(S5REST) and the S&P 500. I will also be
comparing Starbucks to its main competitors:
 McDonald’s
 Nestle
 Panera Bread
 Duncan Donuts
 Domino’s Pizza

Price to Earnings
Starbucks is currently trading at $36.22,
about 6% richer than its most frequent price. The
considerable dip in SBUX’s P/E in 2002 and 2007 is
due to the fact that their earnings monstrously. Their
CAGR EPS for these two periods each averaged 19%
respectively. During this time, the CAGR rate for the
stock price of SBUX only grew 6% for each period,
leading to a drop in the PE ratio. The rise in the PE
from 2008 to 2010 was due to the downturn in the
economy, which led to less revenue and a fall in EPS.
The CAGR EPS rate fell (53%) while the CAGR rate
for the stock only fell 27%. It looks to have stayed
around the median of $34 since the crash and
reemergence of the economy, which seems to be the
normalized PE ratio in a stable economy.
When Starbucks is compared to the S&P
Restaurant Industry, SBUX is trading 2% cheaper
than the industry. In the past, SBUX has traded 13%
richer than their industry. When comparing SBUX to
their industry over the last 7 years, they’ve spent
most of the period trading below the line when
compared to other restaurants as a whole, trading at
an average of 23% cheap to the restaurant industry.
Starbucks is also trading very cheap compared to its
peers. Dominos and Panera Bread are both trading
well above 30 while the only company to be trading
cheaper than Starbucks looks to be McDonalds,
trading at 18.
When compared to the S&P 500, Starbucks
is currently trading 7% expensive. Much of their time
trading expensive was from 2001-2006. Over the last
7 years, exactly similar to SBUX vs. their industry,
SBUX has been trading cheap. An average of 18%
cheaper to the S&P.
Many of the assumptions that come along
with a low PE stock are that a company with a low
PE ratio either has weak growth or bad fundamental
ratios. But as we saw in many of the earlier ratios
calculating the liquidity and solvency, Starbucks has
outperformed the market in almost every ratio except
for true growth, which might also be the most
important ratio. But judging from the naked eye,
Starbucks looks to be growing at a very large rate
with 3,000 prospective store openings through 2015.
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11.21.01 11.21.05 11.21.09 11.21.13
SBUX's Current PE trading
6% higher than its median
Chart # 34
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Chart #35SBUX trading close
to S5REST
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SBUX just above S&P 500 Chart #36

Price/Earnings to Growth (PEG)
The PEG ratio is used to aid investors on the
expected growth the market is expecting for
Starbucks.
Starbucks is currently trading 55% more
expensive than its historical median price. The high
PEG is said to be foreshadowing a lower 5-year
growth possibility for Starbucks.
As we can see from the implied 5-year
growth for Starbucks, the coffee based company has
been steadily growing over the past 4 years and now
sits at a shade under 12% implied growth. Even
though Starbucks’s PEG ratio is extremely expensive,
many investors are expecting this company to grow
even further. Many of these investors looking for
even more growth out of Starbucks probably were
swayed by the company’s expansion plans.
As we can see from chart #39, Starbucks is
3rd
in line when compared to its main competitors. I
believe Panera is still in that exponential growth
stage. It’s only a matter of time before their growth
tails off to its normalized value. McDonalds has
revitalized itself recently by entering the coffee
market and making their food a little healthier.
Starbucks looks to be on the brink of catching up to
McDonalds and Panera Bread, if their new stores can
produce efficiently.
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its historical median
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8%
10%
12% Chart #38
SBUX implied 5 Year
Growth
sbux mcd pnra nrsgy dom dnkn
11.3% 13.3%
15.1%
10.1%
7.5%
6.2%
Chart #39
5 year implied growth
for main competitors

Price to Sales (PSR)
Price to sales is a relative value indicator
that aids investors in determining the appeal of a
stock by dividing its stock price by its earnings per
share. Low PSR stocks may be interpreted as
companies with great potential growth in the future.
This helps investors figure out how much they are
paying for every dollar of sales for the company.
We can see here that Starbucks’ PSR is well
above its historical median, currently trading 46%
rich. From early 2001 to now, Starbucks has lived
above its historical median of $2.81.
When comparing Starbucks against the
restaurant industry, it is currently trading 11% rich at
the moment. The comparison vs. Starbucks’
competition has fluctuated from trading very rich
early on to dirt cheap about five years ago. Now, it is
approximately in line with the rest of the restaurant
industry.
Starbucks vs. the S&P doesn’t make the
company look any more alluring. Starbucks is
currently trading 26% rich to the stock market as a
whole. With all three of these charts above the
median line, the prospects of cashing in on any
unrealized growth for Starbucks looks razor thin. The
possibility still may exist for those who choose to
invest in the restaurant industry. Judging from all
three charts, Starbucks looks overvalued when
looking at the PSR alone. Judging by the
competition, Starbucks is in line with its main
competitor, as McDonald’s PSR checks in at $2.48 vs
the S&P. Panera Bread has the lowest PSR out of
Starbucks’ main competitors, $1.30, which is unheard
of for a restaurant. Panera prides itself on low costs,
high food prices and low staffing.
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Chart #40
PSR for SBUX is
trading rich
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Chart #41
SBUX PSR vs S5REST
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Chart #42
SBUX PSR vs S&P500

Price to Book (PBR)
Price to book is used to find out if investors
are overpaying for a company. One major
discrepancy for analysts is that PBR fails to take into
account intangible assets. Seeing that Starbucks does
not contain a large portion of intangible assets, I feel
this ratio will reflect a definite truth on how the
company is doing.
Starbucks’ current price to book is $9.89,
50% higher than its median rate of $6.61. Starbucks
looks to be overvalued based on its historical median.
Many seem in awe of Starbuck’s growth prospects:
new stores, expanding into the food industry. Even
though this is all true, many feel that Starbucks is still
overpriced.
Starbucks looks to be trading currently 2%
lower than the restaurant industry. Starbucks looks to
be overvalued using the PBR, but so does the rest of
the restaurant industry, as it is in line with its
industry, and has even been trading at an average of
21% cheap over the last four years. When compared
to McDonalds, Starbucks is currently trading 14%
cheaper than the golden arch giant. Panera of course
outperforms Starbucks yet again as it is trading 35%
cheaper than the restaurant industry.
Starbucks is currently trading 38% cheaper
to the market. Another negative valuation for
Starbucks’ potential value is shown below as
Starbucks is currently trading at $3.80 compared to
the market’s $2.75 price.
I felt that the PBR ratio would be a great
indicator on Starbucks’ true value. The analysis of
Starbucks looks to be definitely pointing to Starbucks
being overvalued.
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Chart #43
SBUX PBR vs historical median
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3.5 Chart #44SBUX PBR vs S5REST
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Chart #45SBUX PBR vs S&P500

Price to Cash Flow (PCFR)
Price to cash flow is a financial ratio
designed to determine a firm’s future financial health.
This valuation is more reliable than others such as
PER, since earnings can easily be doctored by
management. The PCFR is such an attractive ratio
because cash flows cannot be affected by
depreciation or other non-cash factors, while earnings
are another story.
The PCFR for SBUX vs. its historical
median gives another negative indicator for SBUX.
Trading 26% rich currently ($21.89), Starbucks is
overvalued vs. its history ($17.40).
The PCFR vs. the restaurant industry for
SBUX looks to be trading cheap, 10% cheap to be
exact. SBUX’s valuations vs. the restaurant industry
look to be pointing potential investors completely
away from the restaurant industry. The restaurant
industry as a whole looks to be overvalued if this is
the only category Starbucks can be seen as cheap.
Lastly, vs. the S&P 500, Starbucks is trading
40% rich to the market. Starbucks is currently at
$2.37 vs. the S&P, who is currently $1.71.
Starbucks is trading very rich vs. its own
history and the stock market as a whole. Starbucks
needs a real strong upcoming year in order to put
these naysaying graphs to rest, or else many may
jump off the café-latte bandwagon soon.
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SBUX PCF vs Historical Median
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SBUX PCF trading 10% cheap vs S5REST
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SBUX trading rich vs S&P 500

PB Ratio vs. ROE
The PB ratio is correlated return on equity
and return on investment capital. The P/B ratios are
supposedly correlated to the expected return investors
seek on equity. I used the PBR as the relative input,
ROE as the fundamental input and Beta (1.12) as the
risk measure input. The R square of 0.08 shows that
SBUX is largely overvalued. The yellow point in the
graph currently reflects Starbucks’ current P/B ratio,
which is trading 50 % higher to the market.
PB Ratio vs. ROIC
The PBR vs. ROIC regression shows the
correlation of a company’s PBR vs. its ROIC. This
regression analysis should show that the PBR is
correlated with the return investors seek on their
capital. I used the PBR as the relative input, ROIC as
the fundamental input and the Beta (1.12) as the risk
measure input. In the PBR vs. ROIC chart, we drew
an R square of 82%, which is marvelous for financial
standards. This regression shows that SBUX is
reasonably priced. The trend line shows that the
ROIC and PBR are moving hand in hand. The yellow
dot represents where the company is at this very
moment, as it is trading on point with the market.
This is an odd occurrence, as all other signs are
pointing towards Starbucks being overvalued.
y = -0.1088x + 9.4732
R² = 0.0883
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PB Ratio vs ROE Chart #49
SBUX largely over valued
y = 0.3041x + 2.0424
R² = 0.8286
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PB Ratio vs ROIC
Chart #50
SBUX looks to be fairly valued

EV/EBITDA
EV/EBITDA is a great relative valuation on
enterprise value which most analysts use. This
valuation I believe is much stronger than P/B or P/E
due to EV/EBITDA not taking into account the
firm’s capital structure, since this valuation is capital
structure-neutral, and, therefore, this multiple can be
used to directly compare companies with different
levels of debt. This is a great ratio for companies with
low profit margin.
Starbucks looks to have a higher ratio than
most of its competitors. Again Starbucks looks to be
overvalued when put up against its competition, as
the ratio says its current value compared to its
earnings before taxes and depreciation is higher than
its competitors.
EV/SALES
EV/SALES is also a great relative valuation.
Even though I feel EV/EBITDA is a greater teller of
what’s going on financially behind closed doors, I
thought it was interesting how Starbucks shot down
to the competitor average. When comparing
EV/SALES, Starbucks looks to be leaning to
overvalued status, but in the years prior, Starbucks
held up strong when compared with its competitors.
Dunkin Donuts looks like the company that definitely
takes the loss here, while Panera Bread outperforms
the competition.
The huge jump from EV/SALES TO
EV/EBITDA by Starbucks can only be explained by
Starbucks’s high fixed costs. Starbucks’s revenues
may seem in line with what investors expect its value
to be, but when costs are subtracted, it eats a huge
chunk of those earnings, 81% on average over the
last three years.
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SBUX
Media
PNRA
MCD
Chart #51
EV/EBITDA
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PNRA
MEDIAN
SBUX
Chart #52
EV/SALES

Conclusion on Relative Valuation Analysis
 PE: Cheap
 PEG: Expensive
 PS: Expensive
 PB: Expensive
 PCF: Expensive
 PBR vs ROE: Expensive
 PBR vs ROIC: Fair
 EV/EBITDA & EV/SALES: Expensive
Starbucks seems to be ridiculously expensive
when taking all these valuations into consideration.
Yes, Starbucks is in line, and in some occurrences,
cheaper than the restaurant industry as a whole. But
that doesn’t say much for the restaurant industry.
Panera is the clear runaway winner in the restaurant
industry, beating out Starbucks and the rest of the
competition. For Starbucks to achieve what a new
player, Panera Bread, has already achieved,
Starbucks will need to cut costs dramatically.
Although, there does not seem like a feasible way to
do this, with thousands of new stores expected to
open, new staff that will be hired, costs associated
with expanding internationally, Starbucks’ future
seems as if it will only become less leveraged. Many
financial pundits have valued Starbucks’ true growth
at approximately $46-$48, expecting an extreme
drop. From the data gathered here, they look to be
correct, but it’s improbable that the market will
adhere to Starbucks’ true value anytime soon. Many
investors have been enchanted by the potential for
even more growth with Starbucks’ before mentioned
growth prospects.

Starbucks Valuation

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