henry b. tippie school of management zach geerdes …quality coffee. this demand will drive...

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management Zach Geerdes [[email protected]] Starbucks (SBUX) September 20, 2019

Consumer Discretionary – Specialty Beverage Stock Rating Buy

Investment Thesis Target Price $100 - 105 Starbucks is the dominate player in the coffee market. SBUX has posted double-digit sales growth in four of the last five years, grown their rewards program by 14% YoY, and is currently positioned perfectly to boost earnings moving forward. For these reasons we recommend a BUY and forecast 20% upside. Drivers of Thesis • Coffee is a staple in the U.S., and younger consumers demand premium

quality coffee. This demand will drive Starbucks’ sales, which we forecast to grow at a 5 yr. CAGR of 6.7%.

• With significant opportunities to cut costs, we believe Starbucks can

improve their operating margin from 15.7% in 2018 up to 18.1% in 2023.

• Combined with consumers demanding premium coffee, consumers also continue to consume increased amounts of coffee. These favorable trends can be seen in SBUX’s comparable store sales growth. Which has grown by 2-7% over the past 5 years.

• Starbucks’ industry leading rewards program boasts 17.2 million members.

The program continues to have strong growth, growing 14.0% year over year.

Risks to Thesis • Starbucks’ operating margin has declined from 19.5% in 2016 down to

15.7% in 2018. This can be attributed to rapid expansion. The inability to make margin improvements moving forward could be a sell signal.

• Starbucks is nearing a point of being over built in their Americas region.

Negative consolidated comparable sales growth would indicate cannibalization of sales.

Henry Fund DCF $100.29 Henry Fund DDM $129.75 Relative Multiple $110.43 Price Data Current Price $83.66 52wk Range $54.70 – 99.72 Consensus 1yr Target $95.88 Key Statistics Market Cap (B) $107.80 Shares Outstanding (M) 1,215 Institutional Ownership 74.00% Five Year Beta 0.8 Dividend Yield 1.6% FCF Yield 2.9% Price/Earnings (FY1) 31.1x Price/Sales (FY1) 4.2X Profitability Operating Margin 2018 15.7% Operating Margin 2019E Profit Margin 2018

15.1% 18.3%

Profit Margin 2019E 13.0% Source: Factset

source:Factset

Earnings Estimates Year 2016 2017 2018 2019E 2020E 2021E

HF EPS $1.91 $1.97 $2.42 $2.87 $3.14 $3.56 Consensus $1.89 $1.98 $2.40 $2.84 $3.07 $3.50

12 Month Performance Company Description

source: Yahoo Finance

Starbucks was founded in Seattle, WA in 1971. Today, Starbucks is the largest coffee chain in the world with over 30,000 stores in 77 countries. In 2018, 52.3% of stores were licensed stores, while 48.7% were company operated. Starbucks is known for offering premium coffee selections in addition to various consumer packaged goods, ready to drink beverages and snacks.

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SBUX S&P 500 DNKN

EXECUTIVE SUMMARY

Starbucks is the industry leader in coffee boasting around 30,000 stores worldwide. We believe that SBUX has the capability to improve their operating margin for 15.7% in 2018 to 18.1% in 2023. These operating margin improvements will be achieved by leveraging size, shifting towards more franchised stores, and capitalizing on demand for premium coffee. In addition, we believe that SBUX can continue to produce same store sales growth near 3% by using their rewards program to attract larger and more frequent purchases.

For these reasons we believe that SBUX can make operating margin improvements, while also posting top notch same store sales growth. We recommend a BUY and forecast 20% upside.

COMPANY DESCRIPTION

Starbucks was founded in Seattle, WA in 1971. Today, Starbucks is the largest coffee chain in the world with over 30,000 stores in 77 countries. Starbucks is known for offering premium coffee selections in addition to various consumer packaged goods, ready to drink beverages and snacks.

Starbucks Store Ownership

Every Starbucks in the world is either “Company Operated” or “Licensed.” There are advantages to both types, “Company Operated” stores generate higher revenue levels, while “Licensed” stores generate higher margins. The below chart shows our expectation of the levels of each type of store.

Source: Starbucks 10-K

We expect that Starbucks will continue to open company operated stores in China in order to establish brand quality. On the flip side we expect that the Americas and EMEA markets will continue their push towards a more licensed model in order to increase operating margin. Licensed stores have higher operating margins, thus slight increases in licensed store relative to company operated stores means that margins will see slight improvements. SBUX has 13,983 franchised stores as of end FY2018. Of these stores franchised/licensed stores, 56.4% of the stores are international.

Per Store Revenue Breakdown

SBUX’s has two types of stores Company operated (Corporate) and Licensed (Franchised). The following table shows the breakdown of per store revenue:

Company operated stores have much higher revenue per store because SBUX keeps all of the revenues that flow through company operated stores. Franchised stores are have lower revenue per store because the company only keeps a percentage of the actual sale. The percentage they keep is determined by the royalty rate in the franchise contracts.

We believe that SBUX will be able to drive company revenue per store at a 5 yr. forward CAGR of 2.3%. Improvements in “per store” revenue will heavily depend on SBUX’s ability to gain more transactions or higher ticket prices.

Geographic Breakdown

In 2018, 89% of SBUX stores were located in either the China/Asia Pacific or the Americas (U.S., Canada, Brazil) segment. The following graph demonstrates how we believe the geographic breakdown of Starbucks will shift over time:

TOTAL 2018 2019E 2020E 2021E 2022E 2023ECompany Operated 1.28$ 1.32$ 1.36$ 1.39$ 1.42$ 1.44$ Licensed 0.19$ 0.20$ 0.20$ 0.21$ 0.21$ 0.21$


As one can see we believe that the Americas will drop while CAP will become a greater portion. We believe this transition will happen because Starbucks has put a major focus on penetrating the CAP market, specifically China.

The next graph depicts the expected change in revenue that we believe will occur. Notice that despite Americas having 60% of the stores, the region generates 75% of the store revenue. We believe this is because SBUX is more popular in the Americas than any other region.


Once again, we believe that the Americas region will grow slow relative to the CAP region due to increased growth focus on the CAP region. We believe that the Americas percent revenue will only fall 3% (75% down to 72%), while we expect stores to fall 5% (60% down to 55%). This is due to our belief that stores in the Americas will have the strongest same-store sales growth moving forward.

Americas

Company Operated: 55% / Franchised: 45%

The Americas is the largest market revenue driver for Starbucks. We expect this market to have continued revenue growth with an expected 5 yr. CAGR of 6.4%. While we expect stores to grow at a 5 yr. CAGR of 4.6%. Which means we expect stores to generate more revenue per store in this market moving forward.

China Asia-Pacific (CAP)


The CAP region is Starbucks’ fastest growing segment, and Starbucks has made it a point to continue expanding this market. We are forecasting a 5 yr. CAGR of 11.0% for revenue, and 5 yr. CAGR of 9.2% for store growth. Like the Americas market we believe these stores will begin to generate more revenue per store. Both assumptions are driven by the strategic partnerships that Starbucks has in the Americas and CAP regions. We believe that delivery and expanding reach of customers will help Starbucks boost sales drastically. An increase in marketing efforts will have an adverse impact on operating margins, however we believe that SBUX will still be able to strengthen margins slowly, by shifting stores to franchisees and focusing on costs.

Europe, Middle East, Africa (EMEA)


The EMEA region is a little more uncertain. Store growth has been incredible in this market, averaging over 11.0% store growth over the last 4 years. However, moving forward we believe this store growth will likely slow down which is why we forecast a 5 yr. CAGR of 8.3% store growth and 4.3% revenue growth. Starbucks has not made an significant commitment to this region. We believe the store

Americas 2018 2019E 2020E 2021E 2022E 2023ECompany Operated 1.54$ 1.62$ 1.70$ 1.76$ 1.82$ 1.85$ Licensed 0.23$ 0.24$ 0.25$ 0.25$ 0.26$ 0.26$

CAP 2018 2019E 2020E 2021E 2022E 2023ECompany Operated 0.79$ 0.80$ 0.81$ 0.81$ 0.82$ 0.82$ Licensed 0.11$ 0.11$ 0.12$ 0.13$ 0.13$ 0.14$

EMEA 2018 2019E 2020E 2021E 2022E 2023ECompany Operated 1.17$ 1.20$ 1.22$ 1.23$ 1.25$ 1.26$ Licensed 0.17$ 0.17$ 0.17$ 0.17$ 0.18$ 0.18$

growth will slow as Starbucks will have to focus on improving margins moving forward, and rapidly growing stores in a market that is not generating much revenue is not a good way to do that.

Consumer Packaged Goods (CPG)

Starbucks is widely known for selling coffee in-shop; however, they also sell Consumer Packaged Goods (CPG). An example of this would be Starbucks coffee grounds or a Starbucks Frappuccino that can be found at the grocery store. This segment of revenue flows through the “Other” revenue category on the Income Statement and has had slow growth over the last three years. To boost the sales of CPG products, Starbucks has partnered with Nestle (more on this in the “Recent Developments section). We believe that in the long-term Nestle could help improve CPG sales. We forecast a long term 1.5% growth rate for “Other” revenue.

Target Market

Starbucks’ target market is those who value premium coffee, want brand name goods, and desire efficient operations. In addition, the way that Starbucks always stays up to date on the latest technology (Uber Eats, Online Ordering, Mobile App), we believe that Starbucks’ true focus is on consumers in the Gen Z and Millennial age groups. In general, older generations do not see value in premium coffee, thus they are not necessarily in Starbucks’ target market. The below chart shows how much consumers are willing to pay for coffee by age group.

Source: Statista

If we assume that younger people generally have less money than older people, the above chart is even more

interesting. It shows that the younger generations value coffee more than older generations. We believe this is likely because younger generations have grown up with premium coffee brands like Starbucks while older generations are more accustomed to having coffee at a local diner or at home hence the reason that over 1/3 of 60+ year old people would only pay up to $1 for coffee. Perhaps the reason for this has to do with the shifting meaning of the word “coffee.” Coffee no longer means just straight black coffee. Today, coffee means: latte, mocha, and Frappuccino. The average price for the smallest size on the Starbucks menu is around $3.60(6). This means that over 2/3 of people age 60+ in the survey are automatically priced out of the market. The willingness of younger consumers to pay more for coffee will help Starbucks increase margins moving forward, which is a big reason we believe Starbucks will be able to increase operating margin in the future.

Marketing Advantage

Starbucks has done a superb job marketing with social media. For example, every coffee chain offers seasonal beverages. But how many other coffee chains have as much notoriety as the Pumpkin Spice Latte at Starbucks? None. Starbucks is very good at marketing their brand, which is part of the reason it has become some what of a “cult” following bolstering a rewards program of over 17.2 million people.

Comparable Store Sales (Same Store Sales)

Comparable sales are an important metric when considering a retail company, it helps flush out how much of the sales growth is due to store growth.

Source: Company 10-K’s, Henry Fund Estimates

SBUX has had solid comparable sales growth. This growth has mainly been held up by “Change in Ticket” growth, which means a growth in the final dollar mount per transaction. As we believe that SBUXs is reaching a point of full market saturation, we believe that SBUX will turn to increasing “Change In Ticket” growth. Thus we forecast that “Change in Transaction” growth will stay stagnant and “Change in Ticket” will grow by 3 – 4% per year.

RECENT DEVELOPMENTS

Strategic Partnerships

Starbucks has been actively seeking strategic partnerships in the industry. The first major partnership began on Aug 2nd, 2018 when Starbucks and Alibaba agreed to work together to increase Starbucks’ delivery and online reach to Chinese consumers(7). This partnership will help Starbucks boost their sales in the CAP region. We also believe this partnership may help Starbucks avoid negative sentiment among Chinese consumers throughout the trade war.

On Aug 28, 2018 Starbucks announced a partnership with Nestle. This partnership gave Nestle the rights to sell & market Starbucks’ CPG and food services products. In return Starbucks was given $7.15 billion, which they will recognize straight line over 40 years(8). We believe that Nestles distribution and marketing will help Starbucks expand their CPG sales and let Starbucks focus on improving margins.

Starbucks continues to break down barriers that are keeping U.S. consumers out of their stores. Starbucks is currently testing Uber Eats in select cities across the United

States and they plan on rolling out full coverage starting in 2020(9). Starbucks’ expansion into the delivery market shows their commitment to speedy service. We believe this is a great move and aligns perfectly with their company strategy.

California & Acrylamide

As of June, 2019 California ruled that coffee chains will not have to put carcinogen warning labels on their products. There was a proposition in the California courts to require coffee roasters to add cancer warnings to all products due to the chemical Acrylamide (10).

Had this gone through in California it would have been detrimental to sales growth in the state. Luckily for Starbucks and the coffee industry, the bill was dropped. This leads us to believe that Acrylamide is not a cancer risk to consumers.

Earnings Q3 2019 & FY 2019

Starbucks has a lot of momentum lately, most notably Q3 2019. In Q3 SBUX beat earnings by 7.7%, marking the fifth quarter in a row that SBUX has beaten earnings. However, Shares traded down on the release of Q3 earnings because management gave a presentation at the Goldman Sachs Retail Conference and announced that EPS growth would be 10%, lower than the 13% they had previously promised.

The consensus for Q4 is $0.70; however, we believe that SBUX will continue their momentum and produce $0.75 for Q4 bringing their 2019 total to $2.87. Note that, during the 2018 investor day analysts expected earnings between $2.60 – $2.66 before raising their target to $2.80-$2.82. If we are correct and SBUX beats earnings by 7.1% in Q4, we would expect a similar price jump as Q3. When SBUX beat earnings in Q3 the price jumped 8.3% due to the surprise.

INDUSTRY TRENDS

The retail coffee space has seen significant shifts as consumer demands have shifted over time. The days of simply having a coffee shop and serving a few types of coffee are long gone. Consumers want variety and they want it now.

Convenience is Key for Big Retailers

Convenience is a huge driver for winning business in the coffee industry. Consumers want their morning coffee, and they want it fast and easy. If one examines the coffee industry, they will see a wide variety of products and services all designed to make it easier for consumers to get their coffee fix.

First, single serve coffee (K-Cup). K-Cup’s bring consumers the coffee brands & flavors they love in a convenient, one-time use package. The preparation is easy, and the cleanup is even easier. Lately, this form of coffee has come under fire due to the adverse impact it has on the environment. We believe that the simplicity will keep this type of brewing around, however we feel the “boom” has already occurred.

Second, convenient order. Online ordering/mobile ordering allows customers to order ahead of time so when they stop in the store their order is ready, thus skipping any lines in the store. Along with online ordering, large coffee retailers have also implemented drive-thru windows to keep customer traffic moving.

Last, delivery. Recently Starbucks partnered with Alibaba to get delivery service in China. In the U.S. market programs like Uber Eats & Grub Hub allow consumers to get their food delivered to them.

Every one of these products and services are designed so that a company like Starbucks can cater to the customers convenience demands.

Atmosphere Still Matters

It should be noted that not all consumers treat coffee the same. Some treat it as a quick morning wake up call, others treat it as an experience. We believe that SBUX operates in a middle ground. SBUX fills demand for consumers who want to quickly grab a cup of coffee, however SBUX’s stores are also set up for consumers who wish to spend some time enjoying their coffee and wi-fi. We believe that SBUX has a more relaxing environment then DNKN, which is purely “get in, get out.” However, we also believe many local coffee shops offer more relaxing environments for consumers to lounge in.

In comparison to local coffee shops, we believe SBUX knows they have neglected the “experiential coffee

drinkers” and in result Starbucks has opened stores that they are calling “Reserves.” The Starbucks Reserve stores are much larger than normal stores, and they are designed to give a consumer the coffee experience they crave. These stores are much more “homey” and designed for a more personalized experience. Currently Starbucks only has 6 Reserves worldwide, we do not expect these “Reserves” to grow rapidly because these stores are more of a coffee museum than a retail outlet. Unfortunately, cost and revenue data on these types of stores is not disclosed. However, given the “museum-like” nature of these roasteries we would not be surprised if they have lower margins than regular stores.

Going Green

As the environment becomes a growing concern to consumers many coffee retailers have decided to jump on board and limit their waste. For example, Starbucks has announced they will remove plastic straws from stores by 2020. Dunkin Donuts has announced they will be switching from foam cups to paper cups in a move to lower their footprint.

There is still a lot of single use waste that comes from coffee retailers, but it is important to understand that coffee companies are trying to make switches where they can. We do not believe that the changes will have any adverse impact on margins for Starbucks. In-fact, a shift towards lower waste could help margins. In the graph below you can see that the younger generations are much more likely to bring their own mug/cup when getting coffee. We attribute this to millennials being more environmentally inclined than older generations.

Source: Statista

As one can see, 79% of adults 60 years or older said they never use their own cup when order coffee to go. Now compare that to adults between 18-29 years old, you will see that only 47% of that demographic do not use their own cup.

We believe this shift will continue for retailers like Starbucks. Which means they could potentially cut out significant COGS by reducing the number of cups, lids, and coffee jackets that they use. To push this shift, a lot of retailers have begun offering deals for those who bring their own mugs.

SBUX offers a $0.10 on every 16 oz. order where a consumer brings their own mug. This policy also helps them sell SBUX’s mugs and tumblers. The cost of the cup, lid, and sleeve is unknown. However, we are optimistic that the cost of these three items is more than $0.10.

New Products Please

One of the best ways for firms in the industry to expand is to continue to offer new innovative products. For example seasonal products that increase social media buzz. Not only are these products increasing sales, they are giving free marketing.

Another hot product right now is cold brew, consumers do not just want iced coffee they want drip coffee that is then chilled (cold brew). For Starbucks this is great because they can charge a higher price for cold brew, than they are for iced coffee.

The final big wave in the industry is “single serving” these are also known as “K-Cups.” Single serving coffee is becoming increasingly popular due to the convivence. With single serving coffee the clean up is easy, there is not filter needed, its efficient, and there is no thought involved. A consumer simply puts the cartridge in the machine and hits a button, 10 seconds later they have coffee. The following graph shows the growth in popularity of single-cup brewing systems:

Source: Statista

As one can see, 42% of households have a single-cup brewing system, the growth may be slowing as many worry about environmental impacts of k-cups. However, SBUX is not hurt much by these environmental concerns because they sold the rights to most of their CPG segment to Nestle.

We are optimistic that Nestle will be able to capitalize on trends like single-cup coffee and boost sales in a way that Starbucks could not. This is yet another way that we believe Starbucks will attempt to improve operating margin.

Global Expansion

U.S. markets have become increasingly competitive and companies continue to seek above average growth. This has resulted in foreign expansion.

Starbucks has made the China-Asia Pacific region a large target for growth with a goal of having 3000 stores in China by end FY2020. This is Starbucks’ fastest growing region and moving forward we expect this trend to continue.

Keeping the Customer

In a market with growing competition, repeat customers are a necessity. One way that industry players are attempting to retain customers is by offering rewards programs. Both Starbucks & Dunkin offer rewards point per dollar spent. These programs are clearly designed to try and create a sense of brand loyalty in customers. Starbucks has had considerable success with their rewards program, this program has grown by over 25% in the last two years. This is a vital area of growth for Starbucks as 40% of all of their sales come from Rewards Program

transactions [11]. We expect that Starbucks will continue to push for Rewards Program growth, with a large emphasis on attaining members in China.

More Coffee, More Premium

The coffee market is a huge market and Starbucks is the largest player. The below chart shows Starbucks’ revenue growth against the coffee industry, as defined by IBISWorld:

Source: IBISWorld, Henry Fund Estimates

Starbucks has absolutely crushed the industry in revenue growth. We believe this shows that Starbucks premium coffee is what consumers demand. In addition, per capita consumption has been increasing:

source: IBISWorld

As one can see, even though coffee is thought of as a staple it still has cyclical revenue growth. . However, it should also be noted that Starbucks was not near as prominent during

the last recession. In 2001 SBUX had less than 5,000 stores and in 2007 SBUX had around 15,000 stores, both significantly smaller than the ~30,000 stores SBUX has today. It will be interesting to monitor what happens to coffee consumption in the next recession. We feel that the consumers attitude towards coffee has changed, and it is now considered more of a necessity.

MARKETS AND COMPETITION

The coffee market is very competitive, it is also a very mature market. As we showed above revenue growth in the industry has been very mild. This section will discuss the two largest competitors, Dunkin and McDonalds.

Peer Comparisons

Starbucks (SBUX)

Domestic International Total 2018 14,606 14,718 29,324

Source: Company 10-K

Amongst the three competitors, SBUX has the most balanced store split between domestic and international stores. While we believe that SBUX is potentially cannibalizing some of their U.S. sales, it is promising to see that they have a lot of room to grow internationally. We forecast a CV revenue growth of 3.2%.

McDonalds (MCD)



MCD competes with SBUX on a cost approach. McDonalds sells very low cost coffee, and they can pair it with very low cost food. MCD has a larger reach than SBUX, however they are not necessarily known for coffee. The quality of coffee that MCD is putting out is not what SBUX consumers are looking for.

Dunkin’ Brands Group (DNKN)



DNKN is more of a direct competitor with SBUX, they both operate in very similar ways. DNKN has a lower price point, they approach the market with a value position. They want to give off a sense of quality at an affordable price. We believe that DNKN is a largest threat to SBUX for market share in the industry. DNKN has struggled to boost their same store sales, their U.S. stores have not seen over 2% same store sales growth since 2015!

Rewards Program

As we stated, repeat customers are very important so programs that encourage repeat customers and reward those customers are very crucial. With that being said, below is the count of rewards members:

Count of Rewards Members

Store Count

SBUX 17.2 million 29,324 DNKN 9.8 million 12,871 MCD In the works 37,855

Source: Company 10-K’s

Starbucks is the clear leader in this aspect. We believe that Starbucks clearly has the best rewards program in the industry and they will continue to leverage it to drive up ticket price growth. While we see this as a benefit, it is important to note that the two rewards programs operate in the exact same way. In addition, when one rewards program adds a feature, the rival adds it shortly after.

Margins

Gross Margin EBIT Margin Net Margin SBUX 22.2% 14.8% 13.6% DNKN 49.1% 31.0% 17.2% MCD 52.3% 41.9% 28.3%


One positive is that SBUX’s other non - COGS costs are relatively low. Their margin fluctuates the least. Therefore we believe that SBUX will look for ways to cut costs and increase gross margin.

We were not surprised that SBUX trails on margins. The following table shows the breakdown of franchised vs. company operated stores as a percent of total stores:

Franchised Company Operated SBUX 52% 48% DNKN 100% 0% MCD 93% 7%


SBUX has the lowest percent of franchised stores and thus the lowest margins. A company with higher franchised stores can expect higher margins at the expense of sales.

Sales

As mentioned before company operated stores generate higher revenue, this can be seen in the following graph:


What is most interesting about this chart is that SBUX generates more revenue per licensed store than DNKN does. DNKN is almost 100% franchised; which means SBUX must have higher royalties, or significantly more sales in franchised stores. Either way, SBUX does a better job at generating sales in franchised stores.

Growth

It is very clear that each of these companies has a different strategy within the market. As one can see below, SBUX has been rapidly expanding while DNKN and MCD have been expanding at much lower rates. MCD has been experiencing slow store growth because they have decided to start focus on cost cutting.


It makes sense that MCD is slowing growth, they have the second most stores out of any fast food brand (38,000) and are more than likely experiencing cannibalization of revenue. SBUX on the other hand has ~29,000, which is more than 2x DNKN’s 13,000 stores. We would expect that DNKN would have higher store growth, however that is not that case. The below table shows a breakdown of comparable sales by a 5-year trailing CAGR:

Company Guest Count Ticket Price

Comparable Sales

SBUX 1.2% 3.4% 4.6% DNKN U.S. N/A N/A 1.2% DNKN Int’l N/A N/A 0.2% MCD -0.7% 3.5% 2.8%


Note in the above table, SBUX has been the clear leader in comparable sales growth over the past 5 years. It is also important to note that the bulk of comparable sales growth comes from increases in ticket prices. The surest sign that a company is beginning to cannibalize sale is a downward trend of guest count growth. In 2018, SBUX experienced their first year of negative guest count growth indicating a potential end to their “growth phase.”

We were unable to obtain consolidated information for DNKN, in addition DNKN did not provide any ticket price or guest count growth. Despite the lack of information, it is clear that DNKN trails in comparable sales growth.

The following graph shows the overall sales growth. As one can see SBUX has not only had leading store growth they have also had leading sales growth.


As one can see MCD has been decreasing revenues yet increasing margins. Meanwhile SBUX has had the top sales growth. It should be noted that DNKN saw the spike in 2016 due to a way they recognize revenue.

Overall Message

Through the analysis of the market it has become clear that SBUX has positioned themselves in a growth phase. However, as we just saw, the industry is losing transaction growth. As SBUX phases out of their growth phase we believe that they will also focus on cutting costs, just as MCD did once they exited their growth phase. Similar to MCD, SBUX will have to come up with creative ways to make consumers spend more each time they visit.

ECONOMIC OUTLOOK

Income & Spending Growth

Consumer spending and Income growth are very closely tied together. In general, strong income growth will lead to strong consumer spending. However, it should be noted that strong income growth is not the only factor in strong spending growth. For example, in December 2018 (red arrow) the markets dropped significantly which prompted a huge drop in consumer spending despite one of the strongest months of wage growth in the last three years.

Source: Factset

For a consumer company like Starbucks, both metrics are important. The more money a consumer has the more money they are willing to spend. In addition, if a consumer feels good about how much they are making, it is much more likely that consumer confidence will remain higher.

Consumer Confidence

Source: Factset

Despite a trade war and an inverted yield curve, consumer confidence has been very strong. In fact, the “Present Situation” portion of consumer confidence is at its highest point since Nov 2000, shortly before the “Dotcom Bubble” burst.

Consumer confidence is very important to monitor when dealing with consumer cyclical companies. A dip in the overall consumer confidence can be directly tied to lower consumer spending which in turn results in lower sales for consumer cyclical companies. As we saw earlier, coffee is cyclical

At the moment Fed rate cuts and the trade war with China are our main concerns for the consumer confidence number.

Unemployment

In the past decade the lowest Unemployment rate was 3.5%. This rate was achieved in third quarter of 2019. The current unemployment rate is at 3.6%, many consider this to be full employment. Currently we have no reason to believe that unemployment will spike.

Low unemployment is good for the economy, however low unemployment makes finding workers for quick service restaurants very challenging. While Starbucks may feel some pressure from low unemployment, it should also be noted that Starbucks used the 2017 corporate tax cut to improve benefits and wages for store workers. We believe that better compensation may help Starbucks retain in-store workers. The payment wasn’t a direct payment increase. The payment increase was $500 of stock given to each employee ($2,000 if the employee was a manager), in addition SBUX started offering paid sick time to non-salary employees[12].

Interest Rates

The Fed has now cut the Fed Funds rate thrice in 2019. The current Fed Funds rate range is 1.75% - 2.00%. This is important because a lower Fed Funds rate allows for firms to borrow at lower costs. In addition, the rate cuts are designed to encourage consumer spending in the economy. We believe it is very likely that rates could see at least two more 25bps (1.25% - 1.50%) cuts by the end of 2020.

These rate cuts are good news for Starbucks. As Starbucks has rapidly brought on long term debt, they will be able to continue the trend of financing with debt while borrowing at a lower cost.

Debt Maturity Schedule Analysis

We examined SBUX’s yearly debt obligation, principal plus interest payment, relative to our forecasted EBITDA numbers:

Year EBITDA (mil)

Debt Obligation (mil)

EBITDA/ Debt Obligation

2019 5,416 690 7.8x 2020 6,354 978 6.5x 2021 7,000 1,005 6.9x 2022 7,513 1,144 6.6x 2023 7,848 1,164 6.7x

Source: SBUX 10-K, Henry Fund Estimates

We believe that SBUX will have no problem paying down current debt obligations. Additionally we believe the high EBITDA/Debt Obligation proves that SBUX can handle our forecasted store growth.

SBUX does not engage in floating rate debt, all rates are fixed. Since rates are relatively low right now, we would expect SBUX to continue expanding by issuing low rate debt.

Dollar Value

It is a growing concern that the dollar is currently over-valued, this means that exports are relatively more expensive. The President has called for action to weaken the dollar to benefit trade. If the dollar is weakened then imports become relatively more expensive, an unfavorable change for companies who rely on imported goods such as coffee.

While we acknowledge it is possible that the dollar weakens, we believe that Starbucks’ active hedging positions in the futures market will help protect them from a weaker dollar in the short-term. In 2018, SBUX stated that their hedging activities would limit their maximum gain/loss to net earnings at $31 million (less than 1% of earnings) for FY2019. Most of SBUX FX exposure comes from: China, Japan, Canada, UK, and the EU. SBUX hedge’s with various tools including: futures, forwards, collars and swaps.

China Trade War

The current trade war with China has been a headache for the markets. With a “partial deal” reached we are slightly more optimistic that President Trump will be able to close the trade ware with China. We believe President Trump will attempt to have something in writing before the democratic candidate has been established in the election.

CATALYSTS FOR GROWTH

Cutting Cost - Starbucks has done a phenomenal job of increasing their revenues. Now we believe it is time for them to focus on controlling costs and increasing the bottom line.

Same Store Sales Growth - In the retail sector, controlling same store sales is essential. We believe that Starbucks can make it a goal of theirs to boost same store sales to around 3-4% per year.

Rewards Program – Repeat customers are essential. We believe that Starbucks can continue to improve their rewards program, thus resulting in a stable flow of transactions.

CAP Expansion – We believe that store considerable store growth is still possible in the CAP region. If Starbucks can establish a solid presence and market share in the CAP, they will see considerable sales boosts.

INVESTMENT POSITIVES

Margin Improvement Opportunity - With the growth phase for SBUX coming to an end we believe that SBUX has multiple areas which they can begin to strengthen margins.

Rewards Program - Starbucks has an industry leading rewards program that we believe will continue to help increase sales while retaining loyal customers.

Coffee is HOT - Coffee is a product that is increasing in per capita consumption, and the younger generations are willing to spend more money on this product. This is a very favorable trend for a retailer who sells premium coffee.

Strategic Partnerships – We believe that SBUX’s strategic partnerships will help them continue to increase their global reach while also keeping transaction growth stagnant, rather than negative like the rest of the industry.

INVESTMENT NEGATIVES

A rise in generic single serve and instant coffee consumption or demand would harm the profitability of retail stores in the industry.

Starbucks is a premium brand, in an economic downturn consumer may decide to find generic brands or switch to

cheaper retail brands. However, we do not believe that consumers will ditch their morning coffee.

Any type of regulatory warnings on coffee consumption could have an adverse effect on Starbucks’ sales. Investors should keep an eye on the debate about acrylamide, a byproduct of coffee, being labeled as a carcinogen.

Current trade tensions with China may result in a negative sentiment towards American companies in China. If Chinese consumers opt to avoid Starbucks, this would be a big blow to a region that Starbucks is relying on for major growth.

VALUATION

Operating Margins

We have forecasted gradual margin improvement starting in 2020. We believe the operating margin will move from 15.7% to 17.3% by 2023 for the following reasons:

Increased Focus on Cost Cutting: We believe that as SBUX realizes they are saturating some of their markets, they will have to shift to making their existing stores more profitable. This will come in the form of SGA cuts or COGS cuts.

Market saturation can be seen by the decline in transaction growth. Over the last four years, transaction growth has been declining. The average growth over that time period has been 0.75% transaction growth.

Slight Increase in Licensed Stores: As we previously stated, the franchised/licensed stores offer better margins. As we have forecasted a slight increase in licensed stores, we believe margins will also receive the benefit.

Economies of Scale: This will naturally occur as SBUX’s grows. We believe this will help cut SGA and Other Operating expenses for Starbucks.

Size Leverage - We believe that SBUX could also see improved margins through leveraging their size for better COGS contracts.

Consumer Preference: We believe that the consumer preference of bringing their own cup may work in SBUX’s favor, allowing them to reduce the amount of single use

cups, lids and jackets they use. This is part of the reason that we are forecasting slight decreases in COGS.

Capital Expenditures & Store Growth

We forecast that capital expenditures will be $2 billion dollars in 2019, thereafter we grew capital expenditures at the same rate that we forecast our stores will grow.

Year Cap Ex (mil) Cap Ex Growth

Store Count

Store Growth

2019 2,000 26,644 2020 2,130 6.5% 28,826 6.5% 2021 2,260 6.1% 30,869 6.1% 2022 2,373 5.0% 32,706 5.0% 2023 2,412 1.6% 33,672 1.6%

Source: Henry Fund Estimates

We realize that this implies that all stores have the same cost, and we understand that is likely not accurate. However, we were unable to get a cost per store per region.

DCF

Many assumptions went into making the DCF model. Below are a list of the variable assumptions that had large impacts on the DCF price:

Year Rev Growth

Operating Margin

Net Margin

Share Repurchase

2019 7.72% 15.0.1% 13.03% 12.48% 2020 7.40% 16.85% 13.00% 2.16% 2021 8.46% 17.55% 13.52% 2.06% 2022 6.75% 17.82% 13.77% 1.95% 2023 2.95% 18.12% 14.02% 1.85%

Source: Henry Fund Estimates

It should also be noted that we used a tax rate of 26.50% based on their 2018 tax documents.

Weighted Average Cost of Capital

We used a WACC of 5.83%, which we kept consistent through 2023.

With all these assumptions we ended up with a DCF price of $100.29.

DDM

Without a consistent dividend payout or growth percentage, forecasting an accurate dividend was a challenge. Historically SBUX has paid a dividend equal to anywhere from 35-55% of their GAAP EPS. We forecasted that they would pay out a dividend of around 45-50% of their GAAP EPS moving forward.

Another assumption made in the DDM model was the 28x PE Multiple in the CV Year. This had to be done since SBUX has a deeply negative ROE. The negative ROE was causing the PE Multiple calculation to return a value in excess of 40x, which is simply unrealistic.

With these assumptions made, we forecasted a DDM price of $129.45.

Relative P/S

Given the fact that SBUX and their competitors are all retail companies, we decided that a relative price to sales model made logical sense. We compared SBUX to DNKN, MCD, PEP, KO, and QSR. All these companies sell some sort of drink that competes with SBUX coffee.

With these assumptions made, we forecasted a Relative Price to Sales price of $110.28.

KEYS TO MONITOR

The biggest factor we are watching are the operating and net margins. We believe that Starbucks will begin to put more of an emphasis on improving margins. However, if Starbucks fails to improve margins, we believe that it could signal problems with cost control in which case we would be inclined to re-evaluate our Buy.

As transaction growth has slowed, Starbucks will depend on ticket growth for increased revenue in comparable store sales. If comparable store sales turn negative or even show a consistent trend of moving towards zero, we believe this could be a strong indicator that Starbucks is struggling to innovate.

REFERENCES

1. Starbucks 2018 10 - K 2. McDonalds 2018 10 - K 3. Dunkin’ 2018 10 – K 4. FactSet 5. Statista – Coffee Report 6. IBISWorld 7. Average Price of SBUX Coffee:

https://www.fastfoodmenuprices.com/starbucks-prices/

8. Alibaba Partnership https://stories.starbucks.com/press/2018/starbucks-and-alibaba-announce-partnership-to-transform-coffee-experience/

9. Nestle Partnership https://stories.starbucks.com/press/2018/nestle-and-starbucks-close-deal/

10. Uber Eats Partnership https://delivery.starbucks.com/

11. Acrylamide Case https://www.knowablemagazine.org/article/health-disease/2018/curious-case-acrylamide-californias-prop-65-explained

12. Starbucks Rewards Program https://stories.starbucks.com/press/2019/starbucks-to-enhance-industry-leading-starbucks-rewards-loyalty-program/

13. Pay Increase https://nypost.com/2018/01/24/starbucks-giving-its-workers-raises-thanks-to-tax-law/

IMPORTANT DISCLAIMER

Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.



https://stories.starbucks.com/press/2018/starbucks-and-alibaba-announce-partnership-to-transform-coffee-experience/



https://stories.starbucks.com/press/2018/nestle-and-starbucks-close-deal/

https://stories.starbucks.com/press/2018/nestle-and-starbucks-close-deal/

https://delivery.starbucks.com/

https://www.knowablemagazine.org/article/health-disease/2018/curious-case-acrylamide-californias-prop-65-explained



https://stories.starbucks.com/press/2019/starbucks-to-enhance-industry-leading-starbucks-rewards-loyalty-program/



https://nypost.com/2018/01/24/starbucks-giving-its-workers-raises-thanks-to-tax-law/

https://nypost.com/2018/01/24/starbucks-giving-its-workers-raises-thanks-to-tax-law/

Starbucks (SBUX)Revenue Decomposition ( millions)

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

AmericasAmericas Revenue 11,941.40$ 13,260.00$ 14,765.90$ 15,613.70$ 16,719.10$ 18,181.78$ 19,747.69$ 21,187.38$ 22,453.83$ 23,132.00$ Total # of Stores 14,191 14,803 15,607 16,559 17,454 18,390 19,303 20,196 20,967 21,226 # of Company‐Operated Stores 8,395 8,671 9,019 9,413 9,684 9,999 10,324 10,633 10,926 11,035

Avg Rev Company‐Operated Stores 1.29$ 1.38$ 1.47$ 1.49$ 1.54$ 1.62$ 1.70$ 1.76$ 1.82$ 1.85$ Company‐Operated Stores Revenue 10,866.50$ 11,925.60$ 13,247.40$ 13,996.40$ 14,905.10$ 16,158.99$ 17,518.37$ 18,765.67$ 19,860.18$ 20,459.96$ # of Licensed Stores 5,796 6,132 6,588 7,146 7,770 8,392 8,979 9,563 10,041 10,191 Avg RevLicensed Stores 0.19$ 0.22$ 0.23$ 0.23$ 0.23$ 0.24$ 0.25$ 0.25$ 0.26$ 0.26$ Licensed Stores Revenue 1,074.90$ 1,334.40$ 1,518.50$ 1,617.30$ 1,814.00$ 2,022.79$ 2,229.32$ 2,421.71$ 2,593.65$ 2,672.04$

China/Asia PacificCAP Revenue 1,129.60$ 2,391.70$ 2,932.70$ 3,233.40$ 4,462.60$ 4,970.67$ 5,492.67$ 6,027.60$ 6,515.75$ 6,735.91$ Total # of Stores 4,624 5,462 6,443 7,479 8,530 9,417 10,264 11,137 11,861 12,065 # of Company‐Operated Stores 1,132 2,452 2,811 3,070 5,159 5,675 6,186 6,711 7,215 7,395

Avg Rev Company‐Operated Stores 0.76$ 0.87$ 0.94$ 0.95$ 0.79$ 0.80$ 0.81$ 0.81$ 0.82$ 0.82$ Company‐Operated Stores Revenue 859.40$ 2,127.30$ 2,640.40$ 2,906.00$ 4,096.90$ 4,540.39$ 4,986.14$ 5,450.54$ 5,888.63$ 6,096.20$

# of Licensed Stores 3,492 3,010 3,632 4,409 3,371 3,742 4,079 4,425 4,647 4,670 Avg RevLicensed Stores 0.08$ 0.09$ 0.08$ 0.07$ 0.11$ 0.11$ 0.12$ 0.13$ 0.13$ 0.14$ Licensed Stores Revenue 270.20$ 264.40$ 292.30$ 327.40$ 365.70$ 430.28$ 506.53$ 577.06$ 627.12$ 639.71$

EMEAEMEA Revenue 1,252.20$ 1,168.40$ 1,071.50$ 958.70$ 1,046.90$ 1,098.90$ 1,141.59$ 1,177.32$ 1,226.61$ 1,254.02$ Total # of Stores 2,140 2,362 2,642 2,974 3,320 3,635 3,929 4,203 4,493 4,628 # of Company‐Operated Stores 817 737 523 502 490 466 442 420 408 399

Avg Rev Company‐Operated Stores 1.24$ 1.24$ 1.40$ 1.10$ 1.17$ 1.20$ 1.22$ 1.23$ 1.25$ 1.26$ Company‐Operated Stores Revenue 1,013.80$ 911.20$ 732.00$ 551.00$ 575.60$ 560.49$ 540.45$ 518.56$ 508.04$ 502.86$

# of Licensed Stores 1,323 1,625 2,119 2,472 2,830 3,170 3,487 3,783 4,086 4,229 Avg RevLicensed Stores 0.18$ 0.16$ 0.16$ 0.16$ 0.17$ 0.17$ 0.17$ 0.17$ 0.18$ 0.18$ Licensed Stores Revenue 238.40$ 257.20$ 339.50$ 407.70$ 471.30$ 538.41$ 601.14$ 658.76$ 718.57$ 751.16$

Corporate & OtherCorp & Other Revenue 243.30$ 292.60$ 300.00$ 199.90$ 113.90$ 30.00$ 32.22$ 34.61$ 37.17$ 39.92$ Total # of Stores 411 416 393 327 20 12 12 13 13 14 # of Company‐Operated Stores 369 375 358 290 8 12 12 13 13 14

Avg Rev Company‐Operated Stores 0.65$ 0.76$ 0.83$ 0.68$ 14.09$ 2.50$ 2.59$ 2.69$ 2.78$ 2.88$ Company‐Operated Stores Revenue 238.20$ 286.70$ 296.10$ 197.30$ 112.70$ 30.00$ 32.22$ 34.61$ 37.17$ 39.92$ # of Licensed Stores 42 41 35 37 12 ‐ ‐ ‐ ‐ ‐ Avg RevLicensed Stores 0.12$ 0.14$ 0.11$ 0.07$ 0.10$ ‐$ ‐$ ‐$ ‐$ ‐$ Licensed Stores Revenue 5.10$ 5.90$ 3.90$ 2.60$ 1.20$ ‐$ ‐$ ‐$ ‐$ ‐$

Total Company Operated Store Revenue 12,977.90$ 15,250.80$ 16,915.90$ 17,650.70$ 19,690.30$ 21,289.87$ 23,077.18$ 24,769.38$ 26,294.01$ 27,098.94$ Growth 17.51% 10.92% 4.34% 11.56% 8.12% 8.40% 7.33% 6.16% 3.06%

Total Licensed Store Revenue 1,588.60$ 1,861.90$ 2,154.20$ 2,355.00$ 2,652.20$ 2,991.49$ 3,336.99$ 3,657.53$ 3,939.35$ 4,062.92$ Growth 17.20% 15.70% 9.32% 12.62% 12.79% 11.55% 9.61% 7.71% 3.14%

Total Other Revenues 1,881.30$ 2,103.50$ 2,317.60$ 2,381.10$ 2,377.00$ 2,382.94$ 2,412.73$ 2,442.89$ 2,473.42$ 2,510.53$ Growth 11.81% 10.18% 2.74% ‐0.17% 0.25% 1.25% 1.25% 1.25% 1.50%

Total Revenue 16,447.80$ 19,216.20$ 21,387.70$ 22,386.80$ 24,719.50$ 26,664.30$ 28,826.90$ 30,869.80$ 32,706.78$ 33,672.38$ Growth 16.83% 11.30% 4.67% 10.42% 7.87% 8.11% 7.09% 5.95% 2.95%

Starbucks (SBUX)Income Statement (millions)

Fiscal Years Ending Dec. 31 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023ERevenues:Company‐operated stores revenues 15,197.30$ 16,844.10 17,650.70 19,690.30 21,289.87 23,077.18 24,769.38 26,294.01 27,098.94 Licensed stores revenues 1,861.90$ 2,154.20 2,355.00 2,652.20 2,991.49 3,336.99 3,657.53 3,939.35 4,062.92 Other 2,103.50$ 2,317.60 2,381.10 2,377.00 2,382.94 2,412.73 2,442.89 2,473.42 2,510.53 Total net revenues 19,162.70$ 21,315.90 22,386.80 24,719.50 26,664.30 28,826.90 30,869.80 32,706.78 33,672.38 Cost of sales including occupancy costs 7,787.50$ 8,511.10 9,038.20 10,174.50 11,199.01 11,790.20 12,564.01 13,278.95 13,637.31 Store operating expenses 5,411.10$ 6,064.30 6,493.30 7,193.20 7,865.97 8,446.28 8,983.11 9,452.26 9,663.97 Other operating expenses 522.40$ 545.40 553.80 539.30 573.28 611.13 648.27 680.30 690.28 Depreciation & amortization expenses 893.90$ 980.80 1,011.40 1,247.00 1,413.21 1,499.00 1,605.23 1,700.75 1,750.96 General & administrative expenses 1,196.70$ 1,360.60 1,393.30 1,759.00 1,919.83 1,945.82 2,006.54 2,125.94 2,188.70 Litigation charge (credit) ‐$ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Restructuring & impairments ‐$ ‐ 153.50 224.40 ‐ ‐ ‐ ‐ ‐ Total operating expenses 15,811.60$ 17,462.20 18,643.50 21,137.40 22,971.30 24,292.43 25,807.15 27,238.21 27,931.24 Income from equity investees 249.90$ 318.20 391.40 301.20 310.09 320.94 332.17 343.80 355.83 Operating income (loss) 3,601.00$ 4,171.90 4,134.70 3,883.30 4,003.09 4,855.41 5,394.82 5,812.37 6,096.97 Gain resulting from acquisition of joint venture 390.60$ ‐ ‐ 1,376.40 ‐ ‐ ‐ ‐ ‐ Net gain resulting from divestiture of certain operations ‐$ ‐ ‐ 499.20 622.00 ‐ ‐ ‐ ‐ Loss on extinguishment of debt (61.10)$ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Interest income & other income, net 43.00$ 108.00 275.30 191.40 173.06 187.09 200.35 212.28 218.54 Interest expense 70.50$ 81.30 92.50 170.30 340.60 357.63 375.51 394.29 414.00 Earnings (loss) before income taxes 3,903.00$ 4,198.60 4,317.50 5,780.00 4,457.55 4,684.87 5,219.66 5,630.36 5,901.51 Income tax expense (benefit) 1,143.70$ 1,379.70 1,432.60 1,262.00 980.66 936.97 1,043.93 1,126.07 1,180.30 Net earnings (loss) including noncontrolling interests 2,759.30$ 2,818.90 2,884.90 4,518.00 3,476.89 3,747.90 4,175.73 4,504.29 4,721.21 Net earnings (loss) attributable to noncontrolling interests (1.90)$ (1.20) (0.20) 0.30 ‐ ‐ ‐ ‐ ‐ Net earnings attributable to Starbucks Corporation 2,757.40$ 2,817.70 2,884.70 4,518.30 3,476.89 3,747.90 4,175.73 4,504.29 4,721.21 Weighted average shares outstanding ‐ basic 1,495.90 1,471.60 1,449.50 1,382.70 1,210.17 1,184.01 1,159.67 1,137.04 1,116.01 Net earnings (loss) per share ‐ basic 1.84$ 1.91 1.99 3.27 2.87 3.17 3.60 3.96 4.23 Cash dividends declared per share 0.68$ 0.85 1.05 1.32 1.44 1.55 1.66 1.79 1.92

Starbucks (SBUX)Balance Sheet (millions)

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023ECurrent AssetsCash & cash equivalents 2,128.80 2,462.30 8,756.30 4,051.08 6,770.00 6,533.65 7,816.74 9,215.10 Short‐term investments 134.40 228.60 181.50 184.75 188.06 191.42 194.85 198.34 Accounts receivable, net 768.80 870.40 693.10 953.89 1,031.25 1,104.34 1,170.05 1,204.60 Inventories 1,378.50 1,364.00 1,400.50 1,689.20 1,826.20 1,955.62 2,072.00 2,133.17 Prepaid expenses & other current assets 350.00 358.10 1,462.80 674.05 728.72 780.36 826.80 851.21 Total current assets 4,760.50 5,283.40 12,494.20 7,552.97 10,544.24 10,565.40 12,080.44 13,602.41 Long‐term investments 1,141.70 542.30 267.70 274.35 281.17 288.16 295.32 302.67 Equity & cost investments 354.50 481.60 334.70 540.53 584.36 625.78 663.02 682.59 Property, plant & equipment, net 4,533.80 4,919.50 5,929.10 6,657.21 7,438.72 8,254.36 9,097.57 9,933.66 Deferred income taxes, net 885.40 795.40 134.70 560.08 535.13 596.22 643.13 674.10 Other long‐term assets 417.70 362.80 412.20 416.81 352.76 414.61 429.24 468.82 Other intangible assets 516.30 441.40 1,042.20 900.88 750.98 590.46 420.38 245.28 Goodwill 1,719.60 1,539.20 3,541.60 3,541.60 3,541.60 3,541.60 3,541.60 3,541.60 Total assets 14,329.50 14,365.60 24,156.40 20,444.43 24,028.96 24,876.58 27,170.70 29,451.13 Accounts payable 730.60 782.50 1,179.30 987.05 1,067.11 1,142.73 1,210.73 1,246.48 Accrued liabilities 1,999.10 1,934.50 2,298.40 2,437.82 2,635.53 2,822.31 2,990.26 3,078.54 Insurance reserves 246.00 215.20 213.70 230.51 249.21 266.87 282.75 291.10 Stored value card liability 1,171.20 1,288.50 1,642.90 1,535.21 1,659.72 1,777.35 1,883.11 1,938.71 Current portion of long‐term debt 400.00 ‐ 349.90 ‐ 1,250.00 500.00 1,000.00 1,538.50 Total current liabilities 4,546.90 4,220.70 5,684.20 5,190.59 6,861.57 6,509.25 7,366.85 8,093.32 Long‐term debt 3,602.20 3,932.60 9,090.20 12,089.97 13,540.76 13,946.98 14,365.39 14,796.36 Deferred revenue ‐ ‐ 6,775.70 6,600.70 6,425.70 6,250.70 6,075.70 5,900.70 Other long‐term liabilities 689.70 755.30 1,430.50 1,430.50 1,430.50 1,430.50 1,430.50 1,430.50 Total liabilities 8,438.80 8,908.60 22,980.60 25,311.76 28,258.53 28,137.44 29,238.44 30,220.87 Common Stock & Additional Paid in Capital 42.60 42.50 42.40 42.40 42.40 42.40 42.40 42.40 Retained earnings (accumulated deficit) 5,949.80 5,563.20 1,457.40 (4,585.72) (3,947.97) (2,979.26) (1,786.14) (488.14) Accumulated other comprehensive income (loss) (108.40) (155.60) (330.30) (330.30) (330.30) (330.30) (330.30) (330.30) Total shareholders' equity 5,884.00 5,450.10 1,169.50 (4,873.62) (4,235.87) (3,267.16) (2,074.04) (776.04) Noncontrolling interests 6.70 6.90 6.30 6.30 6.30 6.30 6.30 6.30 Total equity 5,890.70 5,457.00 1,175.80 (4,867.32) (4,229.57) (3,260.86) (2,067.74) (769.74) Total liabilities and Equity 14,329.50 14,365.60 24,156.40 20,444.43 24,028.96 24,876.58 27,170.70 29,451.13

Starbucks (SBUX)Cash Flow Statement (millions)

Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023ENet Income 3,476.89$ 3,747.90$ 4,175.73$ 4,504.29$ 4,721.21$ Depreciation 1,271.89$ 1,349.10$ 1,444.71$ 1,530.68$ 1,575.87$

Cash Flows from Operating ActivitiesShort‐term investments (3.25)$ (3.31)$ (3.37)$ (3.43)$ (3.49)$ Accounts receivable, net (260.79)$ (77.36)$ (73.08)$ (65.72)$ (34.54)$ Inventories (288.70)$ (137.00)$ (129.42)$ (116.37)$ (61.17)$ Prepaid expenses & other current assets 788.75$ (54.67)$ (51.64)$ (46.44)$ (24.41)$ Accounts payable (192.25)$ 80.05$ 75.62$ 68.00$ 35.74$ Accrued liabilities 139.42$ 197.72$ 186.77$ 167.95$ 88.28$ Insurance reserves 16.81$ 18.70$ 17.66$ 15.88$ 8.35$ Stored value card liability (107.69)$ 124.51$ 117.62$ 105.77$ 55.59$ Deferred income taxes, net (Long Term) (425.38)$ 24.95$ (61.09)$ (46.91)$ (30.97)$ Deferred Revenue (175.00)$ (175.00)$ (175.00)$ (175.00)$ (175.00)$ Total Cash Flows from Operating Activities 4,240.69$ 5,095.59$ 5,524.52$ 5,938.69$ 6,155.46$

Cash Flows from Investing ActivitiesLong‐term investments (6.65)$ (6.82)$ (6.99)$ (7.16)$ (7.34)$ Equity & cost investments (205.83)$ (43.84)$ (41.41)$ (37.24)$ (19.57)$ Other intangible assets 141.32$ 149.90$ 160.52$ 170.08$ 175.10$ Other long‐term assets (4.61)$ 64.05$ (61.85)$ (14.63)$ (39.58)$ Capital Expenditures (2,000.00)$ (2,130.60)$ (2,260.35)$ (2,373.89)$ (2,411.96)$ Total Cash Flows from Investing Activities (2,075.77)$ (1,967.31)$ (2,210.08)$ (2,262.84)$ (2,303.37)$

Cash Flows from Financing ActivitiesCommon Stock & Additional Paid in Capital ‐$ ‐$ ‐$ ‐$ ‐$ Long‐term debt 2,999.77$ 1,450.80$ 406.22$ 418.41$ 430.96$ Other long‐term liabilities ‐$ ‐$ ‐$ ‐$ ‐$ APIC 221.18$ 221.18$ 221.18$ 221.18$ 221.18$ Dividends paid (1,741.20)$ (1,831.33)$ (1,928.20)$ (2,032.36)$ (2,144.39)$ Stock Repurchase (8,000.00)$ (1,500.00)$ (1,500.00)$ (1,500.00)$ (1,500.00)$ Current portion of long‐term debt (349.90)$ 1,250.00$ (750.00)$ 500.00$ 538.50$ Total Cash Flows from Financing Activities (6,870.15)$ (409.35)$ (3,550.79)$ (2,392.76)$ (2,453.74)$

Increase (Decrease) in cash & cash equivalents (4,705.22)$ 2,718.93$ (236.35)$ 1,283.09$ 1,398.35$ Cash & cash equivalents at beginning of year 8,756.30$ 4,051.08$ 6,770.00$ 6,533.65$ 7,816.74$ Cash & cash equivalents at end of year 4,051.08$ 6,770.00$ 6,533.65$ 7,816.74$ 9,215.10$

Starbucks (SBUX)Cash Flow Statement (millions)

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018Net earnings (loss) including noncontrolling interests 2,067.70$ 2,759.30$ 2,818.90$ 2,884.90$ 4,518.00$ Depreciation & amortization 748.40$ 933.80$ 1,030.10$ 1,067.10$ 1,305.90$ Deferred income taxes, net 10.20$ 21.20$ 265.70$ 95.10$ 714.90$ Income earned from equity method investees (182.70)$ (190.20)$ (250.20)$ (310.20)$ (242.80)$ Distributions received from equity method investees 139.20$ 148.20$ 223.30$ 186.60$ 226.80$ Loss (gain) resulting from acquisition/sale of equity in joint ventures & certain r (70.20)$ (394.30)$ (6.10)$ (93.50)$ (499.20)$ Net gain resulting from divestiture of certain retail operations ‐ ‐ ‐ ‐ (1,376.40)$ Loss on extinguishment of debt ‐ 61.10$ ‐ ‐ ‐Stock‐based compensation 183.20$ 209.80$ 218.10$ 176.00$ 250.30$ Excess tax benefit on share‐based awards (114.40)$ (132.40)$ (122.80)$ (77.50)$ ‐Goodwill Impairments ‐ ‐ ‐ 87.20$ 37.60$ Other adjustments 36.20$ 53.80$ 45.10$ 68.90$ 89.00$ Accounts receivable (79.70)$ (82.80)$ (55.60)$ (96.80)$ 131.00$ Inventories 14.30$ (207.90)$ (67.50)$ 14.00$ (41.20)$ Accounts payable 60.40$ 137.70$ 46.90$ 46.40$ 391.60$ Accrued litigation charge (2,763.90)$ ‐ ‐ ‐ ‐Income taxes payable, net 309.80$ 87.60$ ‐ ‐ ‐Accrued liabilities & insurance reserves 103.90$ 124.40$ ‐ ‐ ‐Deferred revenue 140.80$ 170.30$ ‐ ‐ ‐Prepaid expenses, other current assets & other assets 4.60$ 49.50$ ‐ ‐ ‐Stored value card liability ‐ ‐ 180.40$ 130.80$ 7,109.40$ Other operating assets & liabilities ‐ ‐ 248.80$ (4.70)$ (677.10)$ Net cash flows from operating activities 607.80$ 3,749.10$ 4,575.10$ 4,174.30$ 11,937.80$

Purchase of investments (1,652.50)$ (567.40)$ (1,585.70)$ (674.40)$ (191.90)$ Sales of investments 1,454.80$ 600.60$ 680.70$ 1,054.50$ 459.00$ Maturities & calls of investments 456.10$ 18.80$ 27.90$ 149.60$ 45.30$ Acquisitions, net of cash acquired ‐ (284.30)$ ‐ ‐ (1,311.30)$ Additions to property, plant & equipment (1,160.90)$ (1,303.70)$ (1,440.30)$ (1,519.40)$ (1,976.40)$ Net proceeds from sale of equity in joint ventures & certain retail operations 103.90$ 8.90$ 69.60$ 85.40$ 608.20$ Other investing activities (19.10)$ 6.80$ 24.90$ 54.30$ 5.60$ Net cash flows from investing activities (817.70)$ (1,520.30)$ (2,222.90)$ (850.00)$ (2,361.50)$

Proceeds from issuance of long‐term debt 748.50$ 848.50$ 1,254.50$ 750.20$ 5,584.10$ Repayments of long‐term debt ‐ (610.10)$ ‐ (400.00)$ ‐Cash used for purchase of non‐controlling interest ‐ (360.80)$ ‐ ‐ ‐Proceeds from issuance of common stock 139.70$ 191.80$ 160.70$ 150.80$ 153.90$ Excess tax benefit from share‐based awards 114.40$ 132.40$ 122.80$ 77.50$ ‐Cash dividends paid (783.10)$ (928.60)$ (1,178.00)$ (1,450.40)$ (1,743.40)$ Repurchase of common stock (758.60)$ (1,436.10)$ (1,995.60)$ (2,042.50)$ (7,133.50)$ Minimum tax withholdings on share‐based awards (77.30)$ (75.50)$ (106.00)$ (82.80)$ (62.70)$ Other financing activities (6.90)$ (18.10)$ (8.40)$ (4.40)$ (41.20)$ Net cash flows from financing activities (623.30)$ (2,256.50)$ (1,750.00)$ (3,001.60)$ (3,242.80)$

Effect of exchange rate changes on cash & cash equivalents (34.10)$ (150.60)$ (3.50)$ 10.80$ (39.50)$ Net increase (decrease) in cash & cash equivalents (867.30)$ (178.30)$ 598.70$ 333.50$ 6,294.00$ Cash & cash equivalents, beginning of period 2,575.70$ 1,708.40$ 1,530.10$ 2,128.80$ 2,462.30$ Cash & cash equivalents, end of period 1,708.40$ 1,530.10$ 2,128.80$ 2,462.30$ 8,756.30$ Cash paid during the period for interest, net of capitalized interest 56.20$ 69.50$ 74.70$ 96.60$ 137.10$ Cash paid during the period for income taxes, net of refunds 766.30$ 1,072.20$ 878.70$ 1,389.10$ 1,176.90$

Starbucks (SBUX)Common Size Income Statement

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023ERevenues:Company‐operated stores revenues 78.90% 79.31% 79.02% 78.84% 79.65% 79.84% 80.05% 80.24% 80.39% 80.48%Licensed stores revenues 9.66% 9.72% 10.11% 10.52% 10.73% 11.22% 11.58% 11.85% 12.04% 12.07%Global consumer products group (CPG), foodservice & other revenues 11.44% 10.98% 10.87% 10.64% 9.62% 8.94% 8.37% 7.91% 7.56% 7.46%Total net revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales including occupancy costs 41.70% 40.64% 39.93% 40.37% 41.16% 42.00% 40.90% 40.70% 40.60% 40.50%Store operating expenses 28.20% 28.24% 28.45% 29.01% 29.10% 29.50% 29.30% 29.10% 28.90% 28.70%Other operating expenses 2.78% 2.73% 2.56% 2.47% 2.18% 2.15% 2.12% 2.10% 2.08% 2.05%Depreciation & amortization expenses 4.31% 4.66% 4.60% 4.52% 5.04% 5.30% 5.20% 5.20% 5.20% 5.20%General & administrative expenses 6.03% 6.24% 6.38% 6.22% 7.12% 7.20% 6.75% 6.50% 6.50% 6.50%Litigation charge (credit) ‐0.12% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Restructuring & impairments 0.00% 0.00% 0.00% 0.69% 0.91% 0.00% 0.00% 0.00% 0.00% 0.00%Total operating expenses 82.90% 82.51% 81.92% 83.28% 85.51% 86.15% 84.27% 83.60% 83.28% 82.95%Income from equity investees 1.63% 1.30% 1.49% 1.75% 1.22% 1.16% 1.11% 1.08% 1.05% 1.06%Operating income (loss) 18.73% 18.79% 19.57% 18.47% 15.71% 15.01% 16.84% 17.48% 17.77% 18.11%Gain resulting from acquisition of joint venture 0.00% 2.04% 0.00% 0.00% 5.57% 0.00% 0.00% 0.00% 0.00% 0.00%Net gain resulting from divestiture of certain operations 0.00% 0.00% 0.00% 0.00% 2.02% 2.33% 0.00% 0.00% 0.00% 0.00%Loss on extinguishment of debt 0.00% ‐0.32% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Interest income & other income, net 0.87% 0.22% 0.51% 1.23% 0.77% 0.65% 0.65% 0.65% 0.65% 0.65%Interest expense 0.39% 0.37% 0.38% 0.41% 0.69% 1.28% 1.24% 1.22% 1.21% 1.23%Earnings (loss) before income taxes 19.21% 20.37% 19.70% 19.29% 23.38% 16.72% 16.25% 16.91% 17.21% 17.53%Income tax expense (benefit) 6.64% 5.97% 6.47% 6.40% 5.11% 3.68% 3.25% 3.38% 3.44% 3.51%Net earnings (loss) including noncontrolling interests 12.57% 14.40% 13.22% 12.89% 18.28% 13.04% 13.00% 13.53% 13.77% 14.02%Net earnings (loss) attributable to noncontrolling interests 0.00% ‐0.01% ‐0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net earnings attributable to Starbucks Corporation 12.57% 14.39% 13.22% 12.89% 18.28% 13.04% 13.00% 13.53% 13.77% 14.02%

Starbucks (SBUX)Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023ECurrent AssetsCash & cash equivalents 10.39% 7.98% 9.99% 11.00% 35.42% 15.19% 23.49% 21.17% 23.90% 27.37%Short‐term investments 0.82% 0.42% 0.63% 1.02% 0.73% 0.69% 0.65% 0.62% 0.60% 0.59%Accounts receivable, net 3.84% 3.75% 3.61% 3.89% 2.80% 3.58% 3.58% 3.58% 3.58% 3.58%Inventories 6.63% 6.82% 6.47% 6.09% 5.67% 6.34% 6.34% 6.34% 6.34% 6.34%Prepaid expenses & other current assets 1.74% 1.74% 1.64% 1.60% 5.92% 2.53% 2.53% 2.53% 2.53% 2.53%Total current assets 23.42% 20.72% 22.33% 23.60% 50.54% 28.33% 36.58% 34.23% 36.94% 40.40%Property, plant & equipment, net 21.39% 21.33% 21.27% 21.98% 23.99% 24.97% 25.80% 26.74% 27.82% 29.50%Deferred income taxes, net 5.49% 4.33% 4.15% 3.55% 0.54% 2.10% 1.86% 1.93% 1.97% 2.00%Other long‐term assets 1.21% 2.17% 1.96% 1.62% 1.67% 1.56% 1.22% 1.34% 1.31% 1.39%Other intangible assets 1.66% 2.72% 2.42% 1.97% 4.22% 3.38% 2.61% 1.91% 1.29% 0.73%Goodwill 5.21% 8.22% 8.07% 6.88% 14.33% 13.28% 12.29% 11.47% 10.83% 10.52%Total assets 63.45% 62.96% 67.22% 64.17% 97.72% 76.67% 83.36% 80.59% 83.07% 87.46%Accounts payable 3.24% 3.57% 3.43% 3.50% 4.77% 3.70% 3.70% 3.70% 3.70% 3.70%Insurance reserves 1.19% 1.17% 1.15% 0.96% 0.86% 0.86% 0.86% 0.86% 0.86% 0.86%Stored value card liability 0.00% 5.13% 5.49% 5.76% 6.65% 5.76% 5.76% 5.76% 5.76% 5.76%Deferred revenue ‐ ‐ ‐ ‐ ‐ 0.00% 4.34% 1.62% 3.06% 4.57%Current portion of long‐term debt 0.00% 0.00% 1.88% 0.00% 1.42% 19.47% 23.80% 21.09% 22.52% 24.04%Total current liabilities 13.64% 19.07% 21.33% 18.85% 22.99% 45.34% 46.97% 45.18% 43.92% 43.94%Long‐term debt 12.45% 12.25% 16.90% 17.57% 36.77% 24.75% 22.29% 20.25% 18.58% 17.52%Deferred revenue 0.00% 0.00% 0.00% 0.00% 27.41% 5.36% 4.96% 4.63% 4.37% 4.25%Other long‐term liabilities 2.38% 3.26% 3.24% 3.37% 5.79% 94.93% 98.03% 91.15% 89.40% 89.75%Total liabilities 28.48% 34.58% 39.59% 39.79% 92.97% 0.16% 0.15% 0.14% 0.13% 0.13%Common Stock & Additional Paid in Capital 0.24% 0.22% 0.20% 0.19% 0.17% 0.16% 0.15% 0.14% 0.13% 0.13%Retained earnings (accumulated deficit) 31.66% 31.18% 27.91% 24.85% 5.90% ‐17.20% ‐13.70% ‐9.65% ‐5.46% ‐1.45%Accumulated other comprehensive income (loss) 0.15% ‐1.04% ‐0.51% ‐0.70% ‐1.34% 30.00% 5.20% 4.86% 4.59% 4.45%Total shareholders' equity 32.05% 30.36% 27.60% 24.35% 4.73% 6.53% 6.35% 6.25% 6.21% 6.37%Noncontrolling interests 0.01% 0.01% 0.03% 0.03% 0.03% ‐1.24% ‐1.15% ‐1.07% ‐1.01% ‐0.98%Total equity 32.06% 30.37% 27.64% 24.38% 4.76% ‐18.28% ‐14.69% ‐10.58% ‐6.34% ‐2.30%

Starbucks (SBUX)Value Driver Estimation (millions)

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Revenue 21,315.90 22,386.80 24,719.50 26,664.30 28,826.90 30,869.80 32,706.78 33,672.38 Less Cost of Sales (including Occupancy Cost) 8,511.10 9,038.20 10,174.50 11,199.01 11,790.20 12,564.01 13,278.95 13,637.31 Less Store Operating Expenses 6,064.30 6,493.30 7,193.20 7,865.97 8,446.28 8,983.11 9,452.26 9,663.97 Less Other Operating Expenses 545.40 553.80 539.30 573.28 611.13 648.27 680.30 690.28 Less Depreciation & Amortization 980.80 1,011.40 1,247.00 1,413.21 1,499.00 1,605.23 1,700.75 1,750.96 Less SG&A Expense 1,360.60 1,393.30 1,759.00 1,919.83 1,945.82 2,006.54 2,125.94 2,188.70 Plus Implied Interest on Operating Leases (3.01%) 192.61 226.93 246.91 250.48 268.69 285.72 301.22 313.95 EBITA 4,046.31 4,123.73 4,053.41 3,943.48 4,803.16 5,348.37 5,769.79 6,055.09 Tax AdjustmentIncome Tax Expense 1,379.70 1,432.60 1,262.00 980.66 936.97 1,043.93 1,126.07 1,180.30 Marginal Tax Rate 33.90% 33.20% 26.50% 26.50% 26.50% 26.50% 26.50% 26.50%Plus Tax Shield on Interest Expense 27.56 30.71 45.13 90.26 94.77 99.51 104.49 109.71 Plus Tax Shield on Restructuring & Impairments ‐ 50.96 59.47 ‐ ‐ ‐ ‐ ‐ Plus Tax Shield on interest of Operating Leases 65.29 75.34 65.43 66.38 71.20 75.72 79.82 83.20 Less Tax Gain resulting from acquisition of joint venture ‐ ‐ 364.75 ‐ ‐ ‐ ‐ ‐ Less Tax on Interest & Other Income 36.61 91.40 50.72 45.86 49.58 53.09 56.25 57.91 Less Tax Net gain resulting from divestiture ‐ ‐ 132.29 164.83 ‐ ‐ ‐ ‐

Less Total Adjusted Tax 1,435.94 1,498.21 884.27 926.61 1,053.37 1,166.07 1,254.13 1,315.30 Plus Change In Deferred Tax (90.00) (660.70) 425.38 (24.95) 61.09 46.91 30.97 NOPLAT 2,610.37 2,535.52 2,508.44 3,442.26 3,724.84 4,243.39 4,562.58 4,770.77 Invested Capital Plus Normal Cash (5% of sales) 1,065.80 1,119.34 1,235.98 1,333.22 1,441.34 1,543.49 1,635.34 1,683.62 Plus Accounts Recievable 768.80 870.40 693.10 953.89 1,031.25 1,104.34 1,170.05 1,204.60 Plus Inventories 1,378.50 1,364.00 1,400.50 1,689.20 1,826.20 1,955.62 2,072.00 2,133.17 Plus Other Current Assets 350.00 358.10 1,462.80 674.05 728.72 780.36 826.80 851.21 Non‐Interest Bearing Current Operating Assets 3,563.10 3,711.84 4,792.38 4,650.36 5,027.52 5,383.81 5,704.19 5,872.59 Less Accounts Payable 730.60 782.50 1,179.30 987.05 1,067.11 1,142.73 1,210.73 1,246.48 Less Accrued Liabilities 1,999.10 1,934.50 2,298.40 2,437.82 2,635.53 2,822.31 2,990.26 3,078.54 Less Insurance reserves 246.00 215.20 213.70 230.51 249.21 266.87 282.75 291.10 Less Stored value card liability 1,171.20 1,288.50 1,642.90 1,535.21 1,659.72 1,777.35 1,883.11 1,938.71 Non‐Interest Bearing Current Operating Liabilities 4,146.90 4,220.70 5,334.30 5,190.59 5,611.57 6,009.25 6,366.85 6,554.82 Net Operating Working Capital (583.81) (508.86) (541.92) (540.23) (584.05) (625.44) (662.66) (682.22) Net property, plant & equipment 4,533.80 4,919.50 5,929.10 6,657.21 7,438.72 8,254.36 9,097.57 9,933.66 Plus PV of Operating Leases 6,398.94 7,539.24 8,203.04 8,321.52 8,926.46 9,492.51 10,007.32 10,430.35 Plus Intangible Assets 516.30 441.40 1,042.20 900.88 750.98 590.46 420.38 245.28 Plus other operating assets 417.70 362.80 412.20 416.81 352.76 414.61 429.24 468.82 Operating Long Term Assets 11,866.74 13,262.94 15,586.54 16,296.42 17,468.92 18,751.94 19,954.51 21,078.12 Less Deferred Revenue ‐ ‐ 6,775.70 6,600.70 6,425.70 6,250.70 6,075.70 5,900.70 Less Other Operating Liabilities 689.70 755.30 1,430.50 1,430.50 1,430.50 1,430.50 1,430.50 1,430.50 Operating Long Term Non‐Interest Bearing Liabilities 689.70 755.30 8,206.20 8,031.20 7,856.20 7,681.20 7,506.20 7,331.20 Invested Capital 10,593.24 11,998.78 6,838.42 7,724.98 9,028.67 10,445.30 11,785.65 13,064.70 WACC 5.83% 5.83% 5.83% 5.83% 5.83% 5.83% 5.83% 5.83%Beginning Invested Capital 5,623.56 10,593.24 11,998.78 6,838.42 7,724.98 9,028.67 10,445.30 11,785.65 Change in Invested Capital 4,969.67 1,405.55 (5,160.37) 886.57 1,303.68 1,416.63 1,340.36 1,279.04 Ending Invested Capital 10,593.24 11,998.78 6,838.42 7,724.98 9,028.67 10,445.30 11,785.65 13,064.70 ROIC ( NOPLAT/Beginning IC) 46.42% 23.94% 20.91% 50.34% 48.22% 47.00% 43.68% 40.48%FCF ( NOPLAT ‐ Change in IC) (2,359.31) 1,129.97 7,668.81 2,555.69 2,421.15 2,826.76 3,222.22 3,491.73 EP (Beginning IC * ( ROIC ‐ WACC )) 2,282.47 1,917.86 1,808.83 3,043.53 3,274.42 3,716.96 3,953.54 4,083.58

NOPLAT: 2,610.37 2,535.52 2,508.44 3,442.26 3,724.84 4,243.39 4,562.58 4,770.77 Less: change in IC (IC1‐IC0): 4,969.67 1,405.55 (5,160.37) 886.57 1,303.68 1,416.63 1,340.36 1,279.04 FCF: (2,359.31) 1,129.97 7,668.81 2,555.69 2,421.15 2,826.76 3,222.22 3,491.73

NOPLAT: 2,610.37 2,535.52 2,508.44 3,442.26 3,724.84 4,243.39 4,562.58 4,770.77 IC0: 5,623.56 10,593.24 11,998.78 6,838.42 7,724.98 9,028.67 10,445.30 11,785.65 ROIC: 46.42% 23.94% 20.91% 50.34% 48.22% 47.00% 43.68% 40.48%

IC0: 5,623.56 10,593.24 11,998.78 6,838.42 7,724.98 9,028.67 10,445.30 11,785.65 Multiplied by: (ROIC‐ WACC) : 40.59% 18.10% 15.08% 44.51% 42.39% 41.17% 37.85% 34.65%EP: 2,282.47 1,917.86 1,808.83 3,043.53 3,274.42 3,716.96 3,953.54 4,083.58

Starbucks (SBUX)Weighted Average Cost of Capital (WACC) Estimation

Risk Free Rate 2.17%Equity Risk Premium 4.95%Beta 0.80Cost of Equity 6.13%

Pre Tax Cost of Debt 3.01%Marginal Tax Rate 26.50%After Tax Cost of Debt 2.21%

Total Shares Outstanding 1,210.17 Share Price $90.81Value of Equity $109,895.74

Current Portion of LT debt and ST debt ‐ Long‐Term Debt 9,090.20 Value of Debt 9,090.20

Total Value $118,985.94Weight of Equity 92.36%Weight of Debt 7.64%

Weighted Cost of Equity 5.66%Weighted Cost of Debt 0.17%WACC 5.83%

Starbucks (SBUX)Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Revenue Growth 2.95% CV ROIC 40.48% WACC 5.83% Cost of Equity 6.13%CV ROE ‐613.35%

Fiscal Years Ending Dec. 31 2019E 2020E 2021E 2022E 2023E1 2 3 4 4

DCF Model

NOPLAT 2,508.44 3,442.26 3,724.84 4,243.39 4,562.58 Cap ex (5,160.37) 886.57 1,303.68 1,416.63 1,340.36 FCF 7,668.81 2,555.69 2,421.15 2,826.76 3,222.22 CV 146,948.66 Discount Factor 1.0583 1.1200 1.1853 1.2544 1.2544PV of FCF 7,246.30 2,281.84 2,042.62 2,253.42 117,143.69

Value of Operating Assets 130,967.87

EP Model

Economic Profit 1,808.83 3,043.53 3,274.42 3,716.96 3,953.54 CV 136,503.36 Discount Factor 1.0583 1.1200 1.1853 1.2544 1.2544 PV 1,709.17 2,717.41 2,762.48 2,963.06 108,816.97 Sum of PV's 118,969.09 Beg IC 11,998.78

Value of Operating Assets 130,967.87

Other long‐term assets 412.20 Other intangible assets 1,042.20 Excess Cash 2,717.86 Value of Non‐Operating Assets 4,172.26

Long Term Debt 9,090.20 ESOP 1,285.19 PV of Operating Leases 8,203.04 Value of Non‐Operating Liabilties 18,578.43

Value of Equity 116,561.70 Next FYE 12/31/2019Shares Outstanding 1,210.17 Last FYE 12/31/2018Intrinsic Value ( As of 12/31) 96.32 Days in FY 365 Adjustment 100.32 Days to FYE 325

Starbucks (SBUX)Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2019E 2022E 2021E 2022E 2023CV

EPS 2.87$ 3.17$ 3.60$ 3.96$ 4.23$

Key Assumptions CV growth 2.95% CV ROE ‐613.35% Cost of Equity 6.13%

Future Cash Flows P/E Multiple (CV Year) 28.00 EPS (CV Year) 4.23 Future Stock Price Dividends Per Share 1.44 1.55 1.66 1.79 1.92

Discount Period 1.00 2.00 3.00 4.00 4.00 Discount Factor 1.06 1.13 1.20 1.27 1.27

Discounted Cash Flows 1.356$ 1.373$ 1.391$ 1.409$ 118.45$

Intrinsic Value( As of 12/31) 123.98$ Adjustment 129.79$

Starbucks (SBUX)Relative Valuation Models

EPS EPSTicker Company Price 2019E 2020E P/E19 P/E20 P/S19 P/S20 EV/EBITDADNKN Dunkin Brands Group $83.80 $3.05 $3.26 27.5 25.7 4.84 4.69 22.90 MCD McDonalds $218.50 $8.03 $8.75 27.2 25.0 7.62 7.42 23.52 PEP PepsiCo $139.15 $5.52 $5.97 25.2 23.3 2.88 2.77 20.88 KO Coca Cola $55.77 $2.11 $2.29 26.4 24.4 6.36 6.07 26.99 QSR Restaurant Brands International $74.97 $2.72 $2.98 27.6 25.2 3.36 3.18 16.90

Average 26.8 24.7 5.0 4.8 22.2

SBUX Starbucks (SBUX) $90.81 2.87 3.17 31.6 28.7 22.03 24.35 21.5

Implied Value: Relative P/E (EPS19) $ 76.93 Relative P/E (EPS20) 78.18$

Relative P/S 19 110.43$ Relative P/S 20 117.50$

Starbucks (SBUX)Key Management Ratios

Fiscal Years Ending Dec. 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Liquidity RatiosQuick Ratio (CA ‐ Cash)/CL 0.58 0.67 0.66 0.67 0.55 0.62 0.58 0.54 Current Ratio ( CA/CL) 1.05 1.25 2.20 1.46 1.54 1.62 1.64 1.68 Cash Ratio (Cash/CL) 0.47 0.58 1.54 0.78 0.99 1.00 1.06 1.14 Operaing Cash Flow Ratio (OCF/CL) 1.01 0.99 2.10 0.82 0.74 0.85 0.81 0.76

Activity or Asset‐Management RatiosInventory Turnover (Sales/Inventory) 15.46 16.41 17.65 15.79 15.79 15.79 15.79 15.79 Receivable Turnover ( Sales / AR) 27.73 25.72 35.67 27.95 27.95 27.95 27.95 27.95 Total Asset Turnover ( Sales/TA) 1.49 1.56 1.02 1.30 1.20 1.24 1.20 1.14 Net WC Turnover (Sales/NWC) 99.79 21.07 3.63 11.29 7.83 7.61 6.94 6.11

Financial Leverage RatiosDebt to Equity ( TL / TE) 1.43 1.63 19.54 (19.07) (41.00) 100.69 19.86 10.91 Equity Multiplier ( TA/TE) 2.43 2.63 20.54 (15.41) (34.86) 89.02 18.45 10.63 Debt to Asset ( TL /TA) 0.59 0.62 0.95 1.24 1.18 1.13 1.08 1.03 Debt to EBITDA 1.63 1.67 3.27 4.31 4.57 4.12 3.99 3.95

Profitability RatiosReturn on Equity (DuPont Analysis) 47.83% 52.86% 384.27% 305.88% 170.41% 0.00% 0.00% 0.00%Return on Asset (NI/TA) 19.66% 20.08% 18.70% 17.01% 15.60% 16.79% 16.58% 16.03%Gross Margin ((Sales‐COGS)/Sales) 60.07% 59.63% 58.84% 58.00% 59.10% 59.30% 59.40% 59.50%Operating Margin (EBIT/ Sales) 19.70% 19.29% 23.38% 16.72% 16.25% 16.91% 17.21% 17.53%Net Profit Margin (Net Income/Sales) 13.22% 12.89% 18.28% 13.04% 13.00% 13.53% 13.77% 14.02%

Payout Policy RatiosDividend Payout Ratio (Dividend/EPS) 44.50% 52.76% 40.37% 50.08% 48.86% 46.18% 45.12% 45.42%Total Payout (( Div. + Repurchase)/ NI)) 112.63% 121.08% 196.47% 280.17% 88.89% 82.10% 78.42% 77.19%

Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases2019 1340.6 2018 1213.1 2017 1125.12020 1273.2 2019 1141.6 2018 1006.22021 1190.2 2020 1068.6 2019 896.42022 1087.3 2021 986.9 2020 821.32023 958.1 2022 888.1 2021 740.5Thereafter 3504.4 Thereafter 3315.2 Thereafter 2695.5Total Minimum Payments 9353.8 Total Minimum Payments 8613.5 Total Minimum Payments 7285Less: Interest 1151 Less: Interest 1074 Less: Interest 886PV of Minimum Payments 8203 PV of Minimum Payments 7539 PV of Minimum Payments 6399

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 3.01% Pre‐Tax Cost of Debt 3.01% Pre‐Tax Cost of Debt 3.01%Number Years Implied by Year 6 Payment 3.7 Number Years Implied by Year 6 Payment 3.7 Number Years Implied by Year 6 Payment 3.6

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 1340.6 1301.4 1 1213.1 1177.7 1 1125.1 1092.22 1273.2 1199.9 2 1141.6 1075.9 2 1006.2 948.33 1190.2 1088.9 3 1068.6 977.6 3 896.4 820.14 1087.3 965.7 4 986.9 876.5 4 821.3 729.45 958.1 826.1 5 888.1 765.7 5 740.5 638.56 & beyond 958.1 2821.1 6 & beyond 888.1 2665.9 6 & beyond 740.5 2170.5PV of Minimum Payments 8203.0 PV of Minimum Payments 7539.2 PV of Minimum Payments 6398.9

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 27.30Average Time to Maturity (years): 5.20Expected Annual Number of Options Exercised: 5.250

Current Average Strike Price: 42.13$ Cost of Equity: 6.13%Current Stock Price: $90.81

2019E 2020E 2021E 2022E 2023EIncrease in Shares Outstanding: 5.25 5.25 5.25 5.25 5.25Average Strike Price: 42.13$ 42.13$ 42.13$ 42.13$ 42.13$ Increase in Common Stock Account: 221.18 221.18 221.18 221.18 221.18

Change in Treasury Stock 8,000 1,500 1,500 1,500 1,500Expected Price of Repurchased Shares: 45.00$ 47.76$ 50.69$ 53.79$ 57.09$ Number of Shares Repurchased: 178 31 30 28 26

Shares Outstanding (beginning of the year) 1,382.70 1,210.17 1,184.01 1,159.67 1,137.04Plus: Shares Issued Through ESOP 5.25 5.25 5.25 5.25 5.25Less: Shares Repurchased in Treasury 177.78 31.41 29.59 27.88 26.27Shares Outstanding (end of the year) 1,210.17 1,184.01 1,159.67 1,137.04 1,116.01

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol SBUXCurrent Stock Price $90.81Risk Free Rate 2.17%Current Dividend Yield 1.45%Annualized St. Dev. of Stock Returns 21.06%

Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price Granted

42.13 27.30 42.13 5.20 47.08$ 1,285$ Total 27.30 42.13$ 5.20 53.50$ 1,285.19$

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