Starbucks purchases, roasts, and sells high-quality coffees, teas, other beverages, and high-quality food items through their various franchisee locations. Furthermore, Starbucks also sells coffee and teas products, and licenses their trademarks to be sold in grocery and food service stores. Some of the names that they license out include Starbucks, Starbucks Reserve, Seattle’s Best Coffee, Teavana, Evolution Fresh, Ethos, and Princi.
Starbucks plans to remain as one of the most recognized/respected brands in the world through expanding their global store base to other markets, geographies, and countries. They plan to do this in markets which they are already present in (ie. Expanding their # of stores in the USA), as well as expand into new, high growth markets like China.
Starbucks plans to continue to offer their customers new coffee, tea, and other products to maintain consistent excitement for their products. Starbucks is also committed to ethical sourcing and positive contribution to the communities that fuel their business in.
Currently, Starbucks has over 32,500 company-operated stores worldwide, of which more than half (18,354) are located in the America’s.
Starbucks has 3 reportable segments:
As mentioned previously, Starbucks is looking to expand in current geographies, as well as into new geographies.
In 2020, Starbucks netted 803 new COMPANY OPERATED locations (opened 1,117 new locations and closed 310 existing locations). Starbucks increased their presence in the USA, China, and Japan by 1.7%, 14.09%, and 6.16% respectively. However, there was only one country that netted less stores YoY, this country was Canada, which saw a decline in their # of Starbucks’ of 1.36%.
In 2020, Starbucks netted 601 LICENSEE OPERATED locations (opened 901 new locations, closed 304 existing locations, and transferred 4 to new locations). Starbucks was able to increase their (licensee operated) presence in all countries they operate except for in the Philippines and Latin America where they each lost 1 store.
It is good to see Starbucks have a large expansion into both China and Japan, as they are both high growth markets that will greatly benefit the operations/revenues of Starbucks in the years to come. I will continue on this topic later on in this analysis if you are interested.
Starbucks Coffee Supply:
Starbucks controls their coffee purchasing, roasting, packaging, and global distribution of their coffee to ensure that their standards are upheld. Starbucks purchases their beans form multiple coffee-producing regions around the world, then bring them in-house to roast them in their several roasteries in America, and finally distribute them to their international fleet of stores.
Starbucks sources their coffee from South America, Africa, and SE Asia, however 2 of their biggest supplying countries are Columbia, and Brazil (this is very important so remember this for later).
Starbucks has stated that the price of coffee beans (especially arabica) is very volatile and depends on the supply and demand (this is also very important) for the beans at any given time. Furthermore, the price of Arabica is also manipulated by the trading of Arabica futures by hedge funds in the commodities market.
Starbucks does hedge their commodity price risk and are covered if the commodity increases or decreases in price by 10% or less. Anything over this 10% increase/decrease, Starbucks will have to incur/save.
Threats to Starbucks Supply:
The Global Disaster Alert and Coordination System (GDACS) has stated that there is an ongoing drought in the Sudeste and Sao Paulo regions of Brazil. This is very important as these regions are among the largest arabica coffee producing regions in all of Brazil. This is important as this drought should continue to decrease Brazil’s supply of arabica beans, and it is likely that Starbucks has farmers in these regions. This lack of supply is likely to result in higher sustained prices for arabica beans in these regions.
As a result of this Starbucks can do one of three things with these higher prices. Firstly, they can split the price increase between them and the consumer (let’s say the price increase is 2 cents per cup of coffee, then Starbucks could lower their margin by 1 cent and charge the customer 1 cent to split the extra cost). Secondly, Starbucks could pass the whole price increase onto their customers (i.e. Customers pay the extra 2 cents per cup, which does not affect Starbucks’ profit). Or lastly, Starbucks can absorb this price increase by themselves, taking the 2-cent hit and leave the prices the same for their customers.
Neither of these options is ideal and it is likely that whatever they choose will hurt their business. This is even true (in theory) if they pass on all the extra costs to their consumers as some customers may not want to pay the extra 2 cents and go to Dunkin or another coffee shop.
Furthermore, any natural disaster in any of their coffee producing regions, will have an impact on the price Starbucks will pay for these beans unless a fixed-rate agreement is made by Starbucks and their farmers.
Historically, Starbucks has performed very well during the holiday season in Q4 and Q1, however they have struggled a bit with their Q2 earnings.
Recently, Starbucks has released their “Starbucks Card” which has helped to balance out the revenue difference between Q1 and Q2. This is because the revenues that they make from these cards is recognized upon redemption (spending the money loaded onto the card) rather than upon purchase of their cards. This helps Starbucks to recognize the revenues of people who buy these cards as gifts for others in the holiday season later in the year.
Human Capital Management:
Starbucks is a very good employer, and has a job satisfaction rating of 82% (Starbucks is Pleasing Employees and Pouring Profits (workforce.com)). Furthermore, the average rating of Starbucks as an employer from their previous employees is 4 stars out of 5, this can be seen through job sites like glassdoor, indeed etc.
This could be because Starbucks offers health insurance to their employees who work 20+ hours a week, pay 100% of tuition from online ASU students and offer scholarships for other employees, they allow for parental leaves for birth, foster, or adoption parents, allow for paid time off if the employee or their family is sick through their “Family Sick Time” program, and offer several mental health services and programs that they cover for their employees.
The fact that Starbucks goes out of their way to offer these programs that are not standard in other workplaces shows that they care about their employees and is why their employee satisfaction score was so high. Now, you may be wondering why I am talking about this, and there are a couple reasons for this. Firstly, this helps Starbucks to lower their employee turnover, meaning that they will not have to pay the extra money to train new employees constantly. Secondly, happier employees are more likely to care/uphold Starbucks standards if they are happy with the way that they are treated, which should help to increase customer retention/satisfaction. Lastly, employees who are happy where they are, tend to be more efficient, which can help Starbucks to generate more revenues.
Having such an experienced management team is very good for the future growth prospects of Starbucks. This team is very fit to expand Starbucks into new geographies and take their business to the net level. Having such an experienced management team helps to prove the legitimacy of Starbucks as a brand (not that there was really ever any doubts), however we know what has happened to coffee companies with sketchy management (*COUGH* *COUGH* Luckin Coffee *COUGH* *COUGH*).
Global Social Impact:
Starbucks feels a sense of responsibility in the countries in which they do business and source their coffee from. Starbucks Global Social Impact (SGSI) are important to Starbucks overall business and helps them to maintain a great social image. Having a good social image is increasingly important, this is discussed in my analysis of Dick’s Sporting Goods, which can be found here.
In order to undergo my comparable analyses, I had to find 4 other companies that I could compare with Starbucks.
These companies have to all be public, have valid financial multiples and ratios, operate in a similar manner to each other, be in the same industry, be of similar geographical reach, and be of somewhat similar market caps (this is not as important as there were not many companies that I found to compare to Starbucks.
I ended up choosing the following 4 companies as the comparable companies I would go on to use in my analyses: $MCD – McDonald’s Corp., $QSR – Restaurant Brands International Inc., $CMG – Chipotle Mexican Grill Inc., and $DENN – Denny’s Corp.
$MCD - McDonalds: I chose to compare Starbucks to McDonalds because McDonalds is a restaurant, is of similar market cap, has international operations, and has a McCafé segment to their business. McDonald’s is in a more mature stage of their business, which helps to give diversity to the comparable analyses and sets a high standard for Starbucks.
$QSR – Restaurant Brands International: I chose to compare Starbucks to this company because $QSR owns Tim Hortons among other restaurants, and Tim Hortons has very similar operations and business to that of Starbucks, also they have similar market caps and are both international (or own multiple international) businesses.
$CMG – Chipotle Mexican Grill: This is where I started to struggle to find comparable companies to Starbucks. However, I decided to compare them to Chipotle, and I know you are probably thinking “why chipotle”? I think that the hype around Starbucks and Chipotle’s food/drink, and the hype around their stocks is similar. Furthermore, Chipotle is a restaurant brand that is arguably in an earlier stage, which again gives the comparable analyses more diversity.
$DENN – Denny’s: I decided to compare Denny’s to Starbucks because they are both restaurants that typically cater to their clients at the beginning of their days, and their stocks have similar hype around them. This is the least compelling comparable, however I think it is still relevant.
I was able to find Starbucks’ WACC through a website called Finbox. Finbox estimated that Starbucks WACC is around 7.2%, which is the number I decided to use in my DCF model.
I was able to find my CAGR by finding the average yearly increase in Starbucks EPS through analyst estimates. The average yearly increase that I found was 20.40%, which I also used in my DCF model.
I was able to fins Starbucks’ effective tax rate for the year 2020 in their SEC 10-K filing. I used this effective rate as a constant tax rate in my model.
In order to best value Starbucks’ stock, I underwent a DCF model and 3 comparable analyses.
The rates that I used for my projections in my DCF model can be found above in the “valuation information” section of this report.
My DCF model predicts that the fair value of Starbucks (given their next 10 years of operations) is $15.95, which implies a downside risk of 85.82%. This is a very large downside risk, and it could be the result of this year’s poor financial performance having an impact on the base numbers and the growth rates. As a result of this being so low, I decided to undergo some comparable analyses to see if they also indicate that Starbucks is overvalued.
In order to undergo these analyses, I needed 4 companies and their financial ratios/multiples that I could use to compare against Starbucks, in order to value their stock, information about these companies can be found under the “competitors” section of this report.
By comparing Starbucks’ EV/EBITDA multiple to their competitors, I found that Starbucks has a fair value of $103.94/share, which would imply a downside risk of 7.61%. This supports the fact that Starbucks is overvalued, however this valuation is far more reasonable. Additionally, I decided to undergo further comparable analyses to see if this result was consistent.
By comparing this multiple to Starbucks’ competition, I found that Starbucks has a potential upside of 13.90%, which would mean that their fair value is $128.14/share. This result may contradict the previously found fact that Starbucks is overvalued, however one more comparable should help clear things up.
By comparing Starbucks’ P/E ratio to their public competitors I found that Starbucks’ stock should be valued at $85.42/share, which would imply a downside risk of 24.07%. This supports the fact that Starbucks is overvalued, and this estimate is a little bit over the top in terms of the downside. I decided to take the average result of the 3 comparable analyses, in order to achieve one, final comparable estimate.
Through taking the average result found in the comparable analyses, I found that Starbucks’ fair value is $105.83/share, which would imply a downside risk of 5.93%, which is very realistic.
I see the current price of $112.50 as being a good opportunity to sell, or in my case open a bear position.
If the price rises to $116/share I would consider exiting my position for a loss of 3.11%.
However, if the price decreases to $106/share, I would sell my position for a gain of 5.78%.