- Starbucks is valued using a discounted cash flow analysis and relative valuation approach. The DCF analysis estimates the enterprise value at $99.945 billion using a WACC of 7.6%. The relative valuation estimates the enterprise value at $60.633 billion.
- Key inputs to the DCF include projected future free cash flows discounted by the WACC, terminal value calculations, and Starbucks' cost of equity and debt.
- The relative valuation compares Starbucks to similar companies to determine appropriate valuation multiples which are then applied to Starbucks' financials.
- Both approaches provide estimates of Starbucks' equity value and estimated share price.
This is a project presentation for Managerial Accounting course. In the form of a corporate financial conference, we aim to convey the company background and financial predictions to investors to persuade them into continue investing in Starbucks.
This is a project presentation for Managerial Accounting course. In the form of a corporate financial conference, we aim to convey the company background and financial predictions to investors to persuade them into continue investing in Starbucks.
A Fortune 500 company, Starbucks share prices reached its peak in 2006 and declined unexpectedly in 2008. Although its business has picked up in 2011 with an increase in operating profits, Starbucks has lost its market leader position to Costa, a chain coffee shop business owned by Whitbread plc. Starbucks’ strategic issues are its decrease in market share, negative brand perception that was invoked by its competitors and its devalued Starbucks’ Experience that was its competitive advantage. A situational analysis of Starbucks was conducted to indicate possible opportunities and threats. Internal analysis and competitor analysis was conducted simultaneously to identify Starbucks distinctive capabilities and weaknesses against competitors. Strategic options such as Market Penetration, Product Development and Market development were assessed for their suitability, acceptability and feasibility. Strategic choices that unravel three issues that Starbucks is challenged with are presented in the report.
This is a competitive matrix prepared for Starbucks Corporation. A case study under the doctorate program of PLM. The competitors analyzed were McDonald's and Dunkin Donuts
An interesting analysis of Starbucks's SWOT, 4Ps, Strategy, Marketing, Finance etc. Hope you will enjoy this presentation. Go through the slides and don't forget to hit like and share buttons. All the best.
A Fortune 500 company, Starbucks share prices reached its peak in 2006 and declined unexpectedly in 2008. Although its business has picked up in 2011 with an increase in operating profits, Starbucks has lost its market leader position to Costa, a chain coffee shop business owned by Whitbread plc. Starbucks’ strategic issues are its decrease in market share, negative brand perception that was invoked by its competitors and its devalued Starbucks’ Experience that was its competitive advantage. A situational analysis of Starbucks was conducted to indicate possible opportunities and threats. Internal analysis and competitor analysis was conducted simultaneously to identify Starbucks distinctive capabilities and weaknesses against competitors. Strategic options such as Market Penetration, Product Development and Market development were assessed for their suitability, acceptability and feasibility. Strategic choices that unravel three issues that Starbucks is challenged with are presented in the report.
This is a competitive matrix prepared for Starbucks Corporation. A case study under the doctorate program of PLM. The competitors analyzed were McDonald's and Dunkin Donuts
An interesting analysis of Starbucks's SWOT, 4Ps, Strategy, Marketing, Finance etc. Hope you will enjoy this presentation. Go through the slides and don't forget to hit like and share buttons. All the best.
"Data is the new oil"
We’ve all heard that before. Most people use the metaphor to communicate data’s value and criticality.
But when we hear that phrase (as we do, often), it triggers in us different thoughts. Both oil and data are naturally fluid and their
value means they are in demand. But they can also both be controversial, opaque and even fought over.
And of course dangerous if
mistreated.
These risks really all stem from one thing – data’s perception.
• Give your data an accurate context, and you remove its controversy.
• Make it readily intelligible, comprehensible and interrogable – for every user and you remove its confusion and ambiguity.
• If you free your data, putting it in the hands of the users who need it, then there are no battles to fight over it.
The International Finance Corporation, AXA and Accenture have produced a report on how much growth the women’s market represents for the insurance industry, and what women (particularly in emerging markets) want and need from insurance products and services. It also provides recommendations on how to attract and retain women as vital clients. This report identifies some of the major opportunities resulting from the increased presence of women in the global insurance marketplace. With increased income, women are enjoying greater spending and household bargaining power. Women represent an attractive customer base that can help insurers grow while improving their operational risks and lowering their operating costs.
2. !
!
1!
1. Table of Contents
1. Table of Contents………………………………………………………………… 1
2. List of Tables.………………………………………………………………….... 2
2.1 List of Appendices…………………………………………………………….3
3. Executive Summary…………………………………………………………........ 4
4. Economic Environment…………………………………………………….......... 5
5. Industry Analysis ………………………………………………………………... 5
6. Company Description……………………………………….…………………… 6
7. Valuation Techniques …………………………………………………………… 6
7.1 Discounted Cash Flow Analysis.…………………………………………….. 7
7.1.A Finding the Cost of Capital.……………………………………….. 7
7.1.A.1 Cost of Debt……………………………………….…….. 7
7.1.A.2 Cost of Equity…………………………………………… 7
7.1.A.3 Capital Structure………………………………………… 8
7.1.A.4 WACC ..………………………………………………… 9
7.1.B Growth Metrics …………………………………………………… 9
7.1.C Cash Flow Projections ………………………………………….. 10
7.1.C.1 Base Year Free Cash Flow………………………….......10
7.1.C.2 Future Free Cash Flow………………………………….12
7.1.D Discounted Cash Flow Valuation ………………………………. 13
7.2 Relative Valuation………………………………………………………….. 14
7.2.A Selecting Comparable Companies……………………………...... 14
7.2.B Valuation Metrics………………………………………………... 14
7.2.C Adjusted Multiples……………………………………………… 15
7.2.D Weighted Valuation…….……………………………………….. 15
8. Debt Valuation…………………………………………………………………... 16
9. Summary of Valuation…………………………………………………………... 16
10. List of References ……………………………………………………………… 17
11. Appendices …………………………………………………………………………. 18
3. !
!
2!
2. List of Tables
Table 3.1 DCF Summary……………………………………………………………….....4
Table 3.2 Relative Valuation Summary…………………………………………………...5
Table 7.1 Cost of Debt……...................………………………………………………......7
Table 7.2 Betas………………………………………………………………………….....8
Table 7.3 Cost of Equity…………………………………………………………………..8
Table 7.4 Present Value of Debt & Equity………………………………………………..8
Table 7.5 Weight of Debt & Equity……………………………………………………….9
Table 7.6 WACC………………………………………………………………………….9
Table 7.7 Revenue Growth Rate…………………………………………………………..9
Table 7.8 Adjusted EBIT………………………………………………………………...10
Table 7.9 Capital Expenditures…………………………………………………………..11
Table 7.10 Normalized Numbers………………………………………………………...11
Table 7.11 Working Capital……………………………………………………………...12
Table 7.12 Normalized Working Capital………………………………………………...12
Table 7.13 Baseline Free Cash Flow…………………………………………………….12
Table 7.14 Projected Future Free Cash Flows…………………………………………...13
Table 7.15 Discounted Cash Flow Summary ………………………………….………..13
Table 7.16 Revenue, EBITDA, and EBIT Multiples…………………………………….14
Table 7.17 Percentage Adjustment to Multiples…………………………………………15
Table 7.18 Adjusted Multiples…………………………………………………………...15
Table 7.19 Weighted Valuation Enterprise Value...............……………………………..15
Table 8.1 Value of Debt………………………………………………………………….16
Table 9.1 Summary of Valuation..……………………………………………………….16
4. !
!
3!
2.1 List of Appendices
1.1 Z – Score Ratings.........................................................................................................18
1.2 Interest Coverage Ratings............................................................................................19
1.3 Starbucks ICR and Z – Score.......................................................................................20
2.1 Corporate Bond Spread................................................................................................21
2.2 Cost of Debt.................................................................................................................21
3.1 Lease Obligations & PV of Lease Obligations............................................................22
3.2 Debt Obligations & PV of Debt Obligations...............................................................22
3.3 Total Present Value of Debt.........................................................................................22
4.1 Output Summary – Starbucks Beta, Daily...................................................................23
4.2 Output Summary – Starbucks Beta, Monthly..............................................................24
4.3 Observed Betas............................................................................................................25
5.1 Weighted Average Cost of Capital..............................................................................26
6.1 Lease Payments...........................................................................................................26
6.2 Adjusted EBIT.............................................................................................................27
6.3 Investments..................................................................................................................28
6.4 Working Capital..........................................................................................................29
6.5 Normalized Working Capital......................................................................................29
6.6 Baseline Cash Flow.....................................................................................................29
7.1 Past Growth Metrics....................................................................................................30
7.2 Future Rates – Revenue Growth Rate.........................................................................30
7.3 Future Rates – Net CapEx...........................................................................................31
7.4 Future Projections........................................................................................................31
8.1 Relative Valuation – Comparable Companies............................................................32
8.2 Relative Valuation – Adjustment Percentages............................................................32
8.3 Relative Valuation – Adjusted Multiples.. ..................................................................32
8.4 Starbucks Valuation Summary....................................................................................33
5. !
!
4!
3. Executive Summary
Started in 1971, Starbucks is the largest coffee company in the world with over 22,519
stores. They are well known for serving more than 30 blends of whole grain coffee, fresh
baked pastries, ready-to-drink bottled drinks, and teas in over 50 countries. Their most
prominent customer base exists within the United States, China, Canada, Japan, and the
United Kingdom. Starbuck’s mission is “to inspire and nurture the human spirit- one
person, one cup, and one neighborhood at a time.” Because Starbucks has predominantly
dominated the market, they continue to have a relatively strong buy rating due to their
continual expansion globally as well as constant growth and development of their
products. Today, Starbuck’s portfolio includes Teavana, Tazo, Seattle’s Best Coffee,
Evolution Fresh, and more. This being said, the industry has been facing increasing
competition from rivals such as Dunkin’ Donuts, Panera, McDonald’s, and more. In
addition, in their trade, Starbucks constantly faces increasing commodity pressures when
it comes to their coffee beans. The quality of coffee beans is extremely sensitive to
changes in weather. Because of this, long periods of drought can severely affect
production. Occasionally, there is also the potential threat of coffee bean farmers
boycotting or going on strike over wages and pay, which could also severely affect
production. Despite these challenges and potential setbacks, Starbucks has continued to
succeed in this tough industry. In this valuation report of the company, we continue to not
only look into the success of Starbucks, which made them the prestigious company they
are today, but also their strong future outlook for continued success.
To find the enterprise value, equity value, and share price of Starbucks, our group used
two separate approaches. Our first method was to observe these values using a discounted
cash flow analysis. A discounted cash flow analysis uses future free cash flow
projections, and discounts them by the weighted average cost of capital to arrive at a
present value estimate. Through our calculations, we arrived at a weighted average cost
of capital at 7.6%. By using this weighted average cost of capital for our discounted cash
flow analysis, we estimated that the enterprise value, equity value, and share price of
Starbucks to be $99.945 billion, $93.809 billion, and $63.18 respectively.
Table 3.1
The second method we used was a relative valuation approach. This approach estimates
Starbuck’s value based on the value of other similar and comparable companies. The
companies we used were Brinker International, Panera, Yum Brands, Chipotle Mexican
Grill, and Tim Hortons. We compared these companies’ revenue multiples, EBIDTA
(Earnings before Interest, taxes, depreciation, and amortization) multiples, and EBIT
DCF$Summary$(in$Millions)$
Enterprise$Value$ $$99,945.74$$
Debt$Value$ $$7,666.21$$
Cash$ $$1,530.10$$
Equity$Value$ $$93,809.63$$
Share$Price$ $$63.18$$
6. !
!
5!
(Earnings before interest and taxes) multiples to develop a relative enterprise value for
Starbucks. Once we calculated these multiples, we then applied it to Starbuck’s own
revenue, EBIDTA, and EBIT. After completing our relative valuation technique, we
estimated the equity value and share price to be $74.571 billion and $50.22 respectively.
Table 3.2
4. Economic Environment
The United States economy has bounced back nicely from the global economic recession
which caused sharp cutbacks in both consumer spending and business investments.
Specifically, the United States’ unemployment rates, the national deficit, the stock
market, and GDP has all improved mightily since the recession. This had led to a great
increase in the rate of consumer purchases on luxuries such as eating out or buying
premium goods. Therefore, over the past couple of years more and more U.S. companies
have thrived and have experienced great growth in terms of revenue. However, many
companies are still dealing with rising labor costs and interest rates that have stifled
profit. Moreover, companies should still worry about the looming possibilities of another
global recession since U.S. export growth has been weakening and real U.S GDP growth
has been slowing down.
In terms of international markets, many countries have also experienced a nice recovery
from the global economic recession, as the global purchasing power of consumers has
increased overall since then. However, major international economies such as China and
Europe have been showing signs of weaknesses. China’s economy, a major attributer in
global growth, has slowed down tremendously in terms of GDP and growth as the
country has been dealing with a surplus of debt. On the other hand, Europe has been
facing political risks that has led to negative economic effects on their economy.
Therefore, global companies are hoping that these two major economies improve on their
situations soon before their problems affects consumer purchasing in both these
economies.
5. Industry Analysis
Starbucks is a part of the coffee shop and food services industry. Companies within this
industry specialize in providing meals or beverages for consumer consumption. The
major leaders within this industry include Starbucks, Darden Restaurants, McDonald’s,
Panera, Yum Brands and Aramark.
Relative$Valuation$Summary$(in$Millions)$
Enterprise$Value$ $$60,633.55$$
Debt$Value$ $$7,666.21$$
Cash$ $$1,530.10$$
Equity$Value$ $$54,497.44$$
Share$Price$ $$36.70$$
7. !
!
6!
The food services industry is huge with over 700,000 United States companies that
generate approximately 540 billion dollars in annual revenue. A big sub-sector of the
food services industry is the coffee shop industry that generates about 39.9 billions
dollars in annual revenue. Starbucks currently dominates this industry with over 22,519
stores worldwide and 39.3% of the industry’s market share (Ibisworld). The closest
market share owner to Starbucks is Dunkin Donuts which holds 21.7% of the market
share. Therefore, the coffee shop industry is highly concentrated as the top two market
share owners controls more than 50% of the total market share. With unemployment
rates gradually decreasing and consumer consumption of coffee rising, the industry is
expected to continue to grow in the next five years. Therefore, the economic outlook for
companies within this industry is positive and these companies should experience more
growth than companies in other industries. However, competition in this industry remains
high as more establishments are trying to enter into this industry. Thus, industries in this
organization need to continue to grow internationally and focus on having a clear market
position against the growing number of competitors in order to remain competitive.
6. Company Description
Starbucks operates as a roaster, marketer, and retailer of specialty coffee in 68 countries
worldwide. The company not only sells coffee but also sells teas, fresh food items, and
snacks through all their company-operated and licensed stores. Starbucks primary brand
is the Starbucks coffee brand, however, the company also sells goods and services under
other brand names such as Teavana, Tazo, and Seattle’s Best Coffee.
Additionally besides having different brand segments, Starbucks also has different
business segments which include four operating segments: Americas (including U.S.A
and Canada), Europe, Middle East, and Africa (EMEA); China/Asia Pacific (CAP), and
Channel Development. The United States account for 69% of the revenue in these four
segments while the other 31% is split up among the other three segments.
As of 2015, Starbucks has over 23,0000 stores worldwide and generated about 19.2
billion dollars in the most recent fiscal year. Starbucks revenue comes from three sources
company operated restaurants, food services, and company’s goods and services
generated from their other owned brands. The main source of revenue comes from
Starbuck’s company owned restaurants, which accounts for about 79% of Starbucks
revenue. While 11% of Starbucks revenue comes from licensed stores and food services
and the remaining 10% comes from other Starbucks brand businesses.
7. Valuation Techniques
Utilizing two valuation techniques, the discounted cash flow (DCF) analysis and a
relative valuation analysis, we estimated Starbucks’ enterprise value, equity value, and
share price.
8. !
!
7!
7.1 Discounted Cash Flow Analysis
The discounted cash flow (DCF) analysis is a valuation technique that estimates the value
or attractiveness of a company. Through utilizing our estimates of Starbucks’ cost of
debt, cost of equity, and mix of capital structure, we are able to estimate the weighted
average cost of capital (WACC). Furthermore, we utilize certain growth metrics, the
terminal value, and use the WACC as the discount rate on all future free cash flows to
arrive at the present value estimate known as the enterprise value. We then took the
enterprise value, subtracted the market value of debt, and added back cash to find the
equity value. Taking the value of equity and dividing by the number of Starbucks’ shares
outstanding gives us the share price of Starbucks.
7.1.A Finding the Cost of Capital
The cost of capital is the funds that are used to finance the business, specifically the cost
of debt and cost of equity.
7.1.A.1 Cost of Debt
The cost of debt is the effective rate that Starbucks pays on its current debt
obligations. When we calculated the cost of debt, we added the risk-free rate and the risk
premium based on Starbucks’ debt rating from the corporate bond spread. To find the
risk-free rate, we used the coupon rate on a 10-year treasury bond that had a close time to
maturity compared to Starbucks’ debt, with a rate of 2.06%. Regarding the risk premium,
we utilized a synthetic credit rating for Starbucks by comparing other U.S. companies’
Altman’s Z-score and Starbucks’ interest coverage ratio (see Appendix 1.1-1.3). Based
on our analysis, we assumed an A+ debt rating, with a spread of 1.00% (see Appendix
2.1). Adding the Treasury bond and the risk premium results in the cost of debt of 3.06%
Table 7.1
7.1.A.2 Cost of Equity
The cost of equity is the return that shareholders require for Starbucks. In order to find
Starbucks’ cost of equity, we used the capital asset pricing model (CAPM) below:
Required Return on Equity = Risk Free Rate + (Beta * Market Risk Premium)
For the risk free rate, we used a 30-year treasury bond listed at 2.75%, as equity has no
expectations on a maturity timeline. Determining the beta, we first found betas listed on
Cost%of%Debt%
10$Yr$Treasury$Constant$Maturity$Rate$ 2.06%$
A+$Rated$Debt$Premium$ 1.00%$
Cost$of$Debt$ 3.06%$
9. !
!
8!
Google, Yahoo, and Reuters. We also used regressions that analyzed equally weighted
and value weighted indices to Starbucks on a daily and monthly basis, show below:
Table 7.2
Company% Beta%
Google$ 0.79$
Reuters$ 0.78$
Yahoo$ 0.83$
StarbucksVDaily$ 0.77$
StarbucksVMonthly$ 0.74$
$ $Average$ 0.78$
To find our final beta value, we took the average of 0.78 (above), and applied a tax rate
of 34.56% and Starbucks’ debt to equity ratio of 0.04. Our final beta value is 0.76.
Our value for the market risk premium is 6.70%, which is the average return of the
market greater than the risk free rate.
Starbucks’ cost of equity is calculated using the capital asset pricing model:
Table 7.3
Starbucks$Unlevered$Beta$ 0.76$
Market$Risk$Premium$ 6.70%$
30Vyear$Bond$Rate$ 2.75%$
Cost$of$Equity$ 7.85%$
7.1.A.3 Capital Structure
The capital structure is how the company finances its operations and growth utilizing a
mix of long-term debt, short-term debt, common equity, and preferred equity. We used
the weights of debt and equity to calculate the capital structure:
Weight of Debt = Market Value Debt / (Market Value Debt + Market Value Equity)
Weight of Equity = Market Value Equity / (Market Value Debt + Market Value Equity)
Below are Starbucks’ market values of debt and equity:
Table 7.4
Debt$(in$millions)$ Equity$(in$millions)$ Debt$to$Capital$
$$2,048.00$$ $$5,272.00$$ 0.037$
Utilizing the above equations, we found the weights of debt and equity:
10. !
!
9!
Table 7.5
Weight%of%Debt% Weight%of%Equity%
3.67%$ 96.33%$
7.1.A.4 WACC
The weighted average cost of capital (WACC) is a rate to discount Starbucks’ expected
future free cash flows.
WACC formula:
[Weight of Debt * Cost of Debt * (1 - Effective Tax Rate) ] + [Weight of Equity * Cost of
Equity]
We used the leveraged average beta and an effective tax rate as of fiscal year end
2014. The below table displays each component of the WACC:
Table 7.6
Beta% 0.65$
Risk%Premium% 6.70%$
30%Year%Treasury% 2.75%$
Cost%of%Equity% 7.85%$
Cost%of%Debt% 3.06%$
Weight%of%Debt% 0.04$
Weight%of%Equity% 0.96$
Effective%Tax%Rate% 34.56%$
WACC% 7.62%$
7.1.B Growth Metrics
We used analyst reports from Yahoo, CNN, and Nasdaq to calculate the expected
revenue growth for the 2016 fiscal year. In the below table, we took the average growth
rate from analysts to arrive at 18.05% revenue growth for FY16:
Table 7.7
Revenue%Growth%Rate%
$$ 2016$
Nasdaq$ 19.54%$
Yahoo$ 18.20%$
CNN$ 16.42%$
Average$ 18.05%$
11. !
!
10!
To calculate the nominal growth rate, we simply added the GDP growth of 2.00% with
the inflation rate of 2.31%. This gives us a nominal growth rate of 4.31%, which we used
as our terminal growth rate for Starbucks as the baseline for the company approaching
maturity.
7.1.C Cash Flow Projections
7.1.C.1 Base Year Free Cash Flow
In order to project Starbuck’s future free cash flow, the first step would be to establish the
baseline free cash flow. The source of data to calculate the baseline free cash flow is from
the company’s 2015 fiscal year. The formula to calculate free cash flow that we used are
as follows:
FCF = Adjusted EBIT – Net Capital Expenditures – Change in Working Capital
As we can see from this formula, the free cash flow is the earnings from operations minus
investments.
Adjusted EBIT is also called Net Operating Profit After Tax (NOPAT). In order to get
the NOPAT, there are few items that we need to adjust from the regular EBIT that we
found. First of all, we would look for extraordinary items that we did not see in prior
fiscal year. In 2015, Starbucks lost $61.1 million for the extinguishment of debt. We
considered this number as an extraordinary expense and we added this expense as part of
the adjustment. As Starbucks does not own all of their stores, we also account the implied
interest on lease payments to the NOPAT. We treated leases like debt and calculate for
the implied interest, which we got by multiplying the present value of the lease by the
discount rate. Another item that we looked at is the investment section, which in this case
is marketing investment. We got the number by finding the difference between the
marketing expense and the advertising expense. Last but not least, we add all the items
and reduced by the effective tax rate. The following exhibit summarizes Starbuck’s
adjusted EBIT for fiscal year 2015:
Table 7.8
Adjusted%EBIT%(in%Millions)%
EBIT$ $$3,601.00$$
Expense$(+)$ $$61.10$$
Financing$Portion$of$Lease$ $$158.53$$
Marketing$Investment$ $$123.60$$
Adjusted$Earnings$ $$3,944.23$$
Effective$Tax$Rate$$ 34.56%$
NOPAT$ $$2,581.11$$
12. !
!
11!
Net capital expenditures is determined as follows:
Net Capex = Capex – Depreciation + Change in Value of Leases + Acquisitions
As the value of net capital expenditures is varies from year to year, we normalized the
2015 next capital expenditures by using the financial data from the last five years (see
Appendix 6.3). To normalize our data, there are some components that needed, which are
capital expenditures, depreciations, change in value of leases, and acquisitions. Then, we
use the ratio of capital expenditures over sales, which also applied to the other
components, and find the average ratio of each component. The following table
summarizes the normalization process:
Table 7.9
Capital%Expenditures%(in%Millions)%
$$ Normalized$Rates$
CapEx/Sales$ 6.52%$
Depreciation/Sales$ 4.36%$
Change$in$Value$of$Leases/Sales$ 1.86%$
Acquisitions/Sales$ 1.52%$
Based on the normalized ratios, we can determine Starbuck’s normalized Net CapEx for
fiscal year 2015.
Table 7.10
Normalized%Numbers%(in%Millions)%
$%% FY%2015% FY%2014% FY%2013% FY%2012% FY%2011%
$CapEx$ 1249.40$ 1072.39$ 969.31$ 865.64$ 762.86$
$Depreciation$ 834.58$ 716.34$ 647.48$ 578.24$ 509.58$
$Change$in$Value$of$Leases$ 356.57$ 306.05$ 276.63$ 247.05$ 217.72$
$Acquisitions$ 291.02$ 249.79$ 225.78$ 201.63$ 177.69$ Average$
Net$CapEx$ $$1,062.41$$ $$911.89$$ $$824.24$$ $$736.08$$ $$648.69$$ $$836.66$$
The last component to find the baseline free cash flow is the change in working capital.
We use the similar process of normalization for the changing in working capital. First, we
normalized the change in working capital to the change in sales based on the last five
years data. Then, we used the average ratio to find the result of change in working capital
for the most recent fiscal year, as shown in Appendix 6.4. The table as follows
summarizes the normalization of changing in working capital:
13. !
!
12!
Table 7.11
Working%Capital%(in%Millions)%
Fiscal$Year$ Sales$ Working$Capital$ Change$in$Sales$
Change$in$
Working$
Capital$
Working$Capital$
as$%$of$Change$
in$$Sales$
2015$ 19162.70$ 1341.20$ 2714.90$ 153.00$ 5.64%$
2014$ 16447.80$ 1188.20$ 1581.00$ 7.30$ 0.46%$
2013$ 14866.80$ 1180.90$ 1590.00$ V148.40$ V9.33%$
2012$ 13276.80$ 1329.30$ 1576.40$ 517.00$ 32.80%$
2011$ 11700.40$ 812.30$ 993.00$ 248.90$ 25.07%$
2010$ 10707.40$ 563.40$ $$ $$ $$
Based on the normalization of change in working capital to change in sales, we can
determine Starbuck’s normalized change in working capital for 2015.
Table 7.12
Normalized%Working%Capital%(in%Millions)% %%
Normalized$Working$Capital$%$
$
10.93%$
Change$in$Sales$
$
2714.90$
Normalized$Working$Capital$ $$ 296.61$
After finding Starbucks Net Operating After Tax, normalized net capital expenditures,
and normalized change in working capital, we able to calculate the baseline free cash
flow. The table below summarizes the result of baseline free cash flow.
Table 7.13
Baseline%Cash%Flow%(in%Millions)%
Adjusted$EBIT$ $$2,581.11$$
Net$CAPEX$ 836.66$
Change$in$Working$Capital$ 296.61$
Baseline$Cash$Flow$ $$1,447.84$$
7.1.C.2 Future Free Cash Flow
We determined Starbucks’ free cash flows by using the normalized baseline free cash
flow as we calculated before. In order to project the free cash flow as sales grow, we used
the previous ratios and comparing Starbucks’ net operating after tax, net capital
expenditures, and the changing in working capital to sales. We also used the Growth
Metrics data in order to predict the projected sales growth for the upcoming years. Once
we found the projected sales, we used the projected sales to find the future net operating
after tax, net capital expenditures, and change in working capital by multiplying the ratio
of each components with sales. After getting this number, we are able to calculate the
14. !
!
13!
free cash flow by subtracting net capital expenditures and change in working capital from
the net operating after tax.
As we only found sales for 2015, we estimate the growth of the sale using straight-line
method with the aim of the targeted terminal value 4.31%. Furthermore, we also use
straight-line depreciation for the net capital expenditures, which in the terminal value will
eventually equals to zero.
Table 7.14
Projected%Future%Free%Cash%Flows%
$$ 2014$ 2015$ 2016$ 2017$ 2018$ 2019$ 2020$
Terminal$
Value$
$$ V1$ 0$ 1$ 2$ 3$ 4$ 5$ $$
Growth$Rates$
$ $
15.87%$ 12.39%$ 10.37%$ 8.35%$ 6.33%$ 4.31%$
Sales$
$
$16,447.80$$ $$19,162.70$$ $$22,203.37$$ $$24,953.26$$ $$27,539.98$$ $$29,838.88$$ $$31,727.31$$ $$33,094.75$$
NOPAT$
$
$$2,737.87$$ $$3,172.31$$ $$3,565.20$$ $$3,934.77$$ $$4,263.23$$ $$4,533.04$$ $$4,728.41$$
Net$CAPEX$
$
$$1,062.41$$ $$1,392.00$$ $$1,489.58$$ $$1,567.89$$ $$1,622.85$$ $$1,651.29$$ $V$$$$
Change$in$Working$Capital$
$
$$153.00$$ $$260.49$$ $$292.75$$ $$323.09$$ $$350.06$$ $$372.22$$ $$388.26$$
FCF$ $$ $$1,522.46$$ $$1,519.82$$ $$1,782.87$$ $$2,043.79$$ $$2,290.32$$ $$2,509.53$$ $$4,340.15$$
PV$ $$ $$1,522.46$$ $$1,412.03$$ $$1,538.94$$ $$1,639.04$$ $$1,706.47$$ $$1,737.19$$ $$90,389.60$$
$ $ $ $ $ $
$Enterprise$Value$$ $$99,945.74$$
7.1.D Discounted Cash Flow Valuation
After projecting the future free cash flow, we used our calculated WACC to discount the
future free cash flow and the terminal value to their present value. The terminal value is
calculated by using the growth in perpetuity formula:
Terminal value = ((Free Cash Flow) / (WACC – Growth)) / (1+WACC)^t
We were able to found the enterprise value for Starbucks by adding the present values of
all the future cash flows, as seen in Appendix 7.4). After finding the enterprise value, we
calculated the value of equity by adding cash and subtracting the debt giving us an equity
value of $93,809.63
Table 7.15
DCF$Summary$(in$Millions)$
Enterprise$Value$ $$99,945.74$$
Debt$Value$ $$7,666.21$$
Cash$ $$1,530.10$$
Equity$Value$ $$93,809.63$$
Share$Price$ $$63.18$$
15. !
!
14!
7.2 Relative Valuation
Relative valuation techniques are used to quickly estimate the approximate value of a
firm through the market value of other comparable firms in the same industry. To
conduct a relative valuation we first selected similar firms to Starbucks, then calculated
revenue multiples, earnings before interest and taxes (EBIT) multiples, and earnings
before interest, taxes, depreciation, and amortization (EBITDA) multiples for each of the
comparable firms. Next we calculated a percent to adjust our multiples by in order to
account for Starbucks’ greater size, margins, and growth. This gave us adjusted multiples
to apply to Starbucks in order for us to get our relative valuation.
7.2.A Selecting Comparable Companies
In order to make this an accurate relative valuation, we needed to select the right
comparables. This means selecting companies in the same industry that also have similar
revenue, margins, and growth. We decided that in order to get a good number of
companies we needed to have companies with revenue of at least $2.5 Billion. Then we
looked at companies with an operating margin within 7 percentage points of Starbucks
and had growth rates within 6 percentage points of Starbucks. That gave us a clean list of
five companies that we could use in our relative valuation. Those companies are as
follows: Brinker Intl., Panera Bread, Yum Brands, Chipotle, and Tim Hortons.
7.2.B Valuation Metrics
Next we calculated our metrics. The three multiples we used were the revenue multiple,
the EBIT multiple, and the EBITDA multiple. To find the revenue multiple we divided
each company’s adjusted value by its’ revenue. After that we took the median of the five
revenue multiples. We did the same thing for EBIT and EBITDA. We divided the
adjusted value by the respective metric and took the median of each. At this point we had
three different metrics from our comparable companies; a median revenue multiple, a
median EBIT multiple, and a median EBITDA multiple, as seen in Appendix 8.1.
Table 7.16
Company% Revenue% EBIT% EBITDA%
Adjusted%
Value%
Revenue%
Multiple%
EBITDA%
Multiple% EBIT%Multiple%
BRINKER$INTL$INC$ $3,002$ $312$ $457$ $4,408$ 1.47$ 9.64$ 14.13$
PANERA$BREAD$CO$ $2,682$ $259$ $394$ $4,968$ 1.85$ 12.61$ 19.20$
YUM$BRANDS$INC$ $13,105$ $1,993$ $2,731$ $32,998$ 2.52$ 12.08$ 16.56$
CHIPOTLE$MEXICAN$GRILL$INC$ $4,501$ $777$ $907$ $14,428$ 3.21$ 15.90$ 18.57$
TIM$HORTONS$INC$ $3,256$ $636$ $798$ $9,656$ 2.97$ 12.11$ 15.19$
$ $ $ $
Median$ 2.52$ 12.11$ 16.56$
*All Dollar values are in millions
16. !
!
15!
7.2.C Adjusted Multiples
After getting the three multiples we then adjusted each one based on the difference
between the median revenue, median operating margin, and median growth rate of our
five comparable companies. We decided to add 10% to the adjustment because of
Starbucks’ $19 Billion revenue compared to the median of $3.2 Billion. Starbucks also
has an operating margin of 17.5% compared to the median of 15.2% so we elected to add
another 2% to the adjustment. Lastly, we added 5% because of Starbucks’ 18.2% growth
projection whereas the median of the comparables was 13.5%. This gave us an
adjustment of 17%.
Table 7.17
Adjustment% $$ $$ $$
%% Comparables%% Starbucks% Adjustment%to%Multiple%
Revenue$ $3,255.53$$ $19,162.70$$ 10%$
Operating$Margin$ 15.21%$ 17.55%$ 2%$
Growth$ 13.50%$ 18.21%$ 5%$
$ $
Total$ 17%$
Table 7.18
Adjusted%Multiples%
Adjusted$Revenue$Multiple$ 2.95$
Adjusted$EBITDA$Multiple$ 14.17$
Adjusted$EBIT$Multiple$ 19.37$
7.2.D Weighted Valuation
After finding the adjustment, we added that percent to each of our three multiples. We
then applied those multiples to Starbuck’s revenue, EBIT, and EBITDA. From the
revenue multiple we calculated an Enterprise Value of $56.5 Billion. From the EBIT
multiple we calculated an Enterprise Value of $65.1 Billion. Lastly, from the EBITDA
multiple we calculated an Enterprise Value of $60.3 Billion. We took the average of the
three to get an Enterprise Value of $60,633.55.
Table 7.19
%% Enterprise%Value%
Revenue$ $$56,453.80$$
EBITDA$ $$60,300.05$$
EBIT$ $$65,146.79$$
Average$ $60,633.55$
17. !
!
16!
8. Debt Valuation
To calculate the market value of Starbucks’ debt for our valuation, we took into account
not only their outstanding debt, but also their lease payments. We did this because
Starbucks’ lease payments were contractual obligations that required future payments,
similar to debt. For the first step we determined the future payments that needed to be
made for debt and leases in each period of time. We found this information on the
company’s most recent 10-K. We then distributed those required payments across the
respective years. Future payments to be made in the next 1-3 years were split across
2016, 2017, and 2018 or time 1-3. Future payments required in 3-5 years were split
across 2019 and 2020 or time 4 and 5. Lastly, payments to be made after 5 years were
split across 2021 to 2025. We then discounted all of these future payments back to the
present value using the company’s cost of debt, which was 3.06%. The sum of these
present values gave us Starbucks’ total Value of Debt.
Table 8.1
Value%of%Debt% $$
Lease$Obligations$ $$5,034,625.93$$
Debt$Obligations$ $$2,631,580.92$$
Total$Value$of$Debt$ $$7,666,206.86$$
9. Summary of Valuation
We used the discounted cash flow technique and a relative valuation technique to value
Starbucks. The relative valuation in this case would have relation with the industry,
which we calculate by measuring the weight of each component in the industry. The
discounted cash flow technique would follow step by step of the above explanation. The
following tables summarize the valuation.
Table 9.1
$
DCF$ Relative$Valuation$
Enterprise$Value$ $99,945.74$ $$60,633.55$$
Debt$ $7,666.21$ $$7,666.21$$
Cash$ $1,530.10$ $$1,530.10$$
Equity$Value$ $93,809.63$ $$54,497.44$$
Share$Price$ $63.18$ $$36.70$$
18. !
!
17!
List of References
"Global Coffee Shortage Looms as Market Braces for Climate Change." Bloomberg.com.
Bloomberg, n.d. Web. 05 Mar. 2016.
<http://www.bloomberg.com/news/articles/2015-10-01/global-coffee-shortage-looms-as-
market-braces-for-climate-change>.
IBISWorld US. N.p., n.d. Web. 3 Mar. 2016.
<http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=1973>.
"STARBUCKS CORP (SBUX:NASDAQ GS): Company Description." Bloomberg.com.
Bloomberg, n.d. Web. 05 Mar. 2016.
<http://www.bloomberg.com/research/stocks/snapshot/snapshot_article.asp?ticker=SBU
X>.
Thomson One. N.p., n.d. Web. 05 Mar. 2016.
<https://www.thomsonone.com/Workspace/Main.aspx?View=Action%3DOpen&BrandN
ame=www.thomsonone.com&IsSsoLogin=True>.
