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Parsimonious Forecasting for Starbucks: Eliminating One-Time Expense and Achieving Sustainable Growth

Explore the elimination of one-time expense for 2013 EPAT and calculate Return on Net Enterprise Assets, Enterprise Profit Margin, and Asset Turnover for Starbucks. Forecast the next 5 years using historical and industry trends while considering the impact of litigation charges. Understand the implications of the terminated Kraft contract and the arbitrator's ruling. Utilize a 37% tax rate assumption for increased earnings. Employ the Average EPM for consistent profit margin forecasting and adjust the EATO growth rate accordingly. Take into account Starbucks' growth strategies including packaged goods sales, coffee market expansion, and global market penetration. Utilize discounted cash flow analysis for projections and address any related questions.

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Parsimonious Forecasting for Starbucks: Eliminating One-Time Expense and Achieving Sustainable Growth

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  1. Parsimonious Forecasting For Starbucks Mitchell Schmitt

  2. Agenda • Elimination of one-time expense for 2013 EPAT • Calculating Return on Net Enterprise Assets • Enterprise Profit Margin • Enterprise Asset Turnover • Forecasting 5 Years using Historical and Industry Trends

  3. EPAT With Litigation Charge

  4. Litigation Charge • Kraft contracted with Starbucks to sell its products • Starbucks terminated the agreement citing breach of contract • Arbitrator ruled in favor of Kraft awarding $2.9 billion in damages and attorney’s fees • One-time expense, eliminate for 2013 EPAT value

  5. EPAT- No Litigation Charge *Assumed 37% tax rate in finding tax expense for increased earnings resulting from removal of litigation charge

  6. EPAT/ SALES X SALES/avg. (NEA)

  7. Profit Margin has remained very consistent for the last four years • As a result, I will use the Average EPM for forecasting purposes

  8. Enterprise Asset Turnover • 2013 number, 3.55, is distorted by effects of litigation liability • $2.784 billion was removed from the liability section • Starbucks may have constructed its balance sheet differently • Will use 4.5 for EATO

  9. Growth Rate • Forecasts reflect growth rate of 7.5 % (Unlikely to maintain double digit growth indefinitely) • 10-K notes state Starbucks intends to maintain large growth rate due to: • Increased packaged goods sales • Expanding Coffee Market • Expansion in China/Asia Pacific and the Americas

  10. Projections

  11. Discounted Cash Flow Analysis

  12. DCF Assumptions

  13. Questions?

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