Starbucks Corporation Long Analyst Report Student Managed Fund ---Graduate Team Yuqi Han & Tao Feng Starbucks Corp (NASDAQ:SBUX) Sector: Consumer Discretionary Current Price Intrinsic Value 52-Week High 52-Week Low P/E Market Cap Recommendation $ 57.51 $ 69 $ 61.43 $ 50.84 29.49 83.82 B BUY Exhibit 1: SBUX vs Sector vs S&P EXECUTIVE SUMMARY 500 Performance Recommendation We issue a BUY recommendation on Starbucks Corp, based on estimated intrinsic value of $69, a 20% of safety margin over closing price of $57.51 on April 14th 2017. Investment thesis 1) Strong Growth Potential: Company intends to grow store portfolio in 2017 by 2100 net opening stores globally and expand its footprints to more regions. 2) Technology-Initiative Strategy: Mobile Order and Pay (MOP) will stimulate more purchasing activities and elevate customer experience. Exhibit 2: Brands under Starbucks 3) Creation of More Customer Occasions: Starbuck launched reserve coffee bars to target premium customers and also provides a wider range of food choices, in terms of quality and taste, to satisfy different customers’ preferences to attract more traffic and visits. BUSINESS DESCRIPTION Starbucks Corporation is a specialty coffee maker, headquartered in Seattle, United States of America. It operates coffee store and roasts, markets and retails whole bean coffee products. It also provides tea and beverages under various brands not only Starbucks Coffee, but also Teavana, Tazo, Seattle Best Coffee etc. In addition, it offers foods and snacks. It sells packaged coffee products, such as whole coffee bean, ground coffee as well as single K-cup, instant coffee products and ready-to-drink coffee products through various channels. Starbucks has more than 25,000 stores worldwide, with around half of its Exhibit 3: Stores as of Oct 2, 2016 operated stores and half of licensed stores. The biggest market is Americas, including U.S., Canada, Brazil and Puerto Rico. More than 60% of the Stores open Regions as of Oct 2, revenue come from Americas market. It also owns stores in EMEA and 2016 China/Asia Pacific (CAP) regions, with EMEA of around 7% of the total Americas US 7880 revenue and CAP of 12% of the total revenue. Canada 1035 Brazil 104 Total Americas 9019 Besides the revenue stream coming from the stores, Starbucks also generate China/Asia Pacific revenue through Channel Development segment. It offers premium Tazo teas, China 1272 whole bean and ground coffee, Starbucks and Tazo single served products; a Japan 1140 Thailand 273 variety of ready-to-drink products, such as Doubleshot Espresso drinks, Singapore 126 Frappuccino drinks and products under other brands, through different Total CAP 2811 EMEA channels, including supermarkets, grocery stores, convenience stores and UK 366 U.S. food services accounts. Starbucks has a joint venture with Pepsi-Cola France 74 Exhibit 3: Continued Company, named North American Coffee Partnership. The network benefits Switzerlands 56 Starbucks to manufacture and distribute ready-to-drink products. Austria 17 Netherlands 10 INDUSTRY OUTLOOK Germany Starbucks is in U.S. Restaurant sub-industry under Consumer Discretionary Total EMEA 523 All Other Segments sector according to S&P Global Industry Classification Standard (GICS). Teavana 355 Consumer discretionary sector is considered to be a leading indicator for U.S. Evolution Fresh (closed in economy. From 2009, U.S. Personal Consumption Expenditure kept 2 2017) increasing. Till October 2016, consumption has already amounted to 68.73% Starbucks Reserve Roastery of U.S. GDP. Consumers have more disposable income in recent years. 1 &Tasting Rooms Statistics indicates an upward trend for the sector and Moody’s held a positive Total 358 outlook. Total Company-Operated 12711 Starbucks, together with McDonald, Carvinal Corp and Yum! Brand Exhibit 4: US Real Disposable dominate two-thirds of the Hotels and Restaurants and Leisure sub-industry. Personal Income Starbucks and McDonald represent about 60% of U.S. Restaurant industry. U.S. restaurants can be classified into three categories 1) Fast food restaurant. They can be divided more specifically into areas, for instance, burger chains, beverage chains (Starbucks Corp) and pizza chains etc. 2) Full service restaurants. They provide wide range of food menu and offer table offering. The prices are more expensive than those in fast food restaurants. Applebee’s Neighborhood Grill & Bar (operated by DineEquity, Inc), Oilve Garden (operated by Darden Restaurants, Inc) belong to this category. 3) Fast casual restaurant. Restaurant provides greater variety of food choices than fast food and the prices lie between those of full service and fast food. For example, Exhibit 5: US Personal Panera Bread and Chipotle fall into this group. Consumption Expenditure/GDP Benefiting from economy recovery and increase in consumer confidence and spending, U.S. Restaurant is on an upward trend. The revenue improvement come from not only domestic market, but also international market by the recent corporate international expansion strategy implemented by many companies to boost the performance. In general, besides intensive international expansion through either organic growth or M&A, U.S. restaurants also tend to employ technology to enhance customer satisfaction. However, the performance matrices are mixed. There are still many restaurants experiencing decline in comparable store sales and traffic. Food Exhibit 6: US Personal safety and health issues have been considered a big issue. McDonald and Consumption Expenditure Yum! Brands suffered a lot in China due to the expired food supply in 2014. INVESTMENT SUMMARY Business Model As the largest beverage chain in the Unites States, Starbucks has its unique business model to operate the giant corporation. SWOT Analysis Strengths Strong operation management Starbucks CEO Howard Schultz spent his life time in establishing his enterprise. He has enlarged company map across the world and has more than Exhibit 7: 2016 Q4 Share of Foot 12000 company-operated stores till now. According to the latest annual Traffic report, net revenue in fiscal year 2016 grew 11% to 21.3 billion dollars and consolidated operating income increased to 16% to 4.2 billion dollars. As projected by itself, the revenue growth in fiscal year 2017 will be 8% to 10%. Large customer base Starbucks possesses a large customer base across the world. Its locations which have been carefully chosen attract lots of traffic. Instead of expanding regular store, it also focuses on targeting specific customers by opening high end stores, such as Starbucks Reserve Roastery and Tasting Rooms. In order to improve customer satisfaction and convenience, it also starts to expand Drive Through stores. (Source: xAd) Weaknesses Exhibit 8: Comparable Store Sales Food issues To U.S. restaurant, food safety issue is a common concern. Before serving food for customers, baristas need to check with customers whether they have food allergies. Starbucks is also vulnerable to food supply. They are responsible for keeping food safe for every item sold. Opportunities Global expansion Starbucks achieves global expansion mainly through opening new stores and cooperates with licensed stores. As of October 2016, the announcement date of annual report, Starbucks has almost 1300 company-owned stores in China Exhibit 9: Change in Ticket and more than 2800 stores in CAP areas. Benefiting from the high popularity and enthusiasm for the products, Starbucks is very likely to achieve high growth rate in CAP areas. Technology Initiative In order to improve the customer satisfaction, Starbucks initiated Mobile Order and Pay to reduce customer waiting time especially in rush hour. Mobile transactions have accounted for one quarter of the total transactions in U.S. and 6% of global transactions in Q4 2016. Even though recent same store sales in Q1 2017 declined to 3% in US, explained by CEO that MOP transferred the queue from inside store to online purchase so that customers Exhibit 10: Change in Transactions still had to wait somehow, the initiative of technology is still a way to boost performance if management can address the current problem. Now in China, Starbucks has partnership with the biggest social media platform, WeChat, enabling mobile payment an easy and fast way to purchase coffee. Threats More alternative beverages and strong competition Customers’ preference swift all the time. More and more boutique and local brands and retailer form strong competition to Starbucks. For example, instead of waiting long line for a cup of coffee, customers prefer to change another coffee shop with similar price and taste to save time. In addition, Exhibit 11: Revenue and Growth people have arose the awareness of healthy eating. More of them prefer to buy fresh juice, low fat beverages rather than coffee drink with milk. However, this will not pose a big threat to Starbucks because coffee is kind of necessities to customers nowadays. Quality and availability of supply for Arabica Coffee beans Supply for Starbucks comes from different regions. Stability of supply of high quality Arabica coffee beans is crucial to Starbucks. Arabica coffee beans are from Africa, Indonesia, Central and South America. Supply from those markets enable the menu complete. Shortage from certain markets could affect the customer choice and product prices Exhibit 12: Earning Per Share (EPS) Competitive Strategy and Plan Grow the store portfolio; double store in China Starbucks is always engaging in expanding its store portfolio worldwide. According to Starbucks views ahead, it set its goal of 2100 net new store globally. In addition, in November 2016, Howard Schultz named Chinese CEO to take care of daily management in China market and planned to double the stores to 5000 from the existing 2300 stores in next 5 years. In India, Starbucks also cooperates with Tata Group to build Teavana brand, a company which was acquired by Starbucks in 2012, aiming to take advantage the huge market opportunities for tea product. Besides introducing Teavana tea bars in Starbucks stores, company also intends to launch standalone Exhibit 13: Operating Income Teavana stores.