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Valuation of Starbucks Using Residual Enterprise Income

Valuation of Starbucks Using Residual Enterprise Income. Mitchell Schmitt. Agenda. Background Information Abnormal Earnings Explained FCF, Residual Income, Abnormal Earnings Calculations % of value captured within forecasted period Conclusion and Questions. Relevant Facts.

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Valuation of Starbucks Using Residual Enterprise Income

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  1. Valuation of Starbucks Using Residual Enterprise Income Mitchell Schmitt

  2. Agenda • Background Information • Abnormal Earnings Explained • FCF, Residual Income, Abnormal Earnings Calculations • % of value captured within forecasted period • Conclusion and Questions

  3. Relevant Facts • CEO is Howard Schultz (Highly Regarded) • Headquartered in Seattle, WA • $13.3 B in revenues in 2012 with operating margins of 15% • Nearly 80% of stores are company-owned vs. franchised • SBUX has paid a dividend for the past 12 quarters

  4. Strategy Mission Statement: To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time. • Product Differentiation; Sell premium products with large profit margins • Outstanding Marketing Campaigns • Repeat Business (Starbucks cards) • Keep Employees Satisfied • Make entering their stores an experience • Company Operated stores

  5. Products Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world • Frappuccino, Lattes, Iced Coffees, Espresso • Also sell tea, other beverages, and fresh food items • Sell packaged products through licensed stores, grocery stores, and other foodservice accounts • K-Cups and Coffee Grounds

  6. Competition • Premium coffee sales compete against quick service restaurants and specialty coffee shops • Main competitors for this segment include Dunkin Donuts, McDonald’s, and Caribou Coffee • Competes with all packaged coffee and tea products sold through supermarkets and other retailers

  7. Abnormal Earnings • Valuation model based on EPAT rather than NEA or FCF • Premium of market value over capitalized EPAT • Cum FCF is compared to last year’s EPAT while growing at Cost of Capital, Abnormal earnings is the excess

  8. Abnormal Earnings • Based on derivation shown, it takes two years to achieve steady state, whereas REI only took one • Retained Earnings are assumed to grow at WACC • Income shifting techniques do not impact valuation • Considered superior model because it explains greater value within forecasted period

  9. Assumptions

  10. FCF Model

  11. REI Model

  12. Abnormal Earnings

  13. % of value explained Feel more comfortable projecting accounting numbers for the upcoming time periods which lends support to the Abnormal Earnings Growth Model being superior

  14. Questions??

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