This case study is in regards to Starbucks' international expansion strategy. It describes the advantages and risks which may be caused by expansion to Europe

Starbucks Coffee

Overvalued Stock Despite Strong Growth

Prospects

Business Analysis and

Security Valuation

Prepared by Erik Eselius, Jon D. Taylor, Olivier te Boekhorst, and Peter Winters

For Professor Charles Lee

Johnson Graduate School of Management, Cornell University

April 29, 1997

TABLE OF CONTENTS

TABLE OF C 2

EXECUTIVE SUMMARY........................................................................................................................ 3

OVERVIEW OF STARBUCKS............................................................................................................... 4

Business Ove 4

Recent Stock Performance.............................................................................................................. 4

COMPETITIVE ANALYSIS .................................................................................................................... 5

Rivalry Among Existing Firms.......................................................................................................... 5

Threat of New Entrants .................................................................................................................... 6

Threat of Substitute Products........................................................................................................... 6

Bargaining Power of Buyers............................................................................................................. 7

Bargaining Power of Suppliers......................................................................................................... 7

STARBUCKS STRATEGY..................................................................................................................... 8

Channels .......... 8

Product Diversification ..................................................................................................................... 9

Human Res 10

Retail Outlets.. 10

ACCOUNTING ANALYSIS................................................................................................................... 12

Discussion of Key Items in Financial Statements .......................................................................... 12

Ratio Analysis: Profitability and Productivity.................................................................................. 13

Earnings 15

Bankruptcy Prediction .................................................................................................................... 17

EBO VALUATION. 18

EPS Forecasts ............................................................................................................................... 18

Long-term Growth Rate.................................................................................................................. 18

Cost of Equity. 18

Dividends ....... 18

Target ROE....

Starbucks Bean Life display in Miami at the Latin ...

Grounds for Your Garden, the Starbucks recycling s...

English: Starbucks' headquarters building in Seatt...

18

Stock Value .... 19

DISCOUNTED CASH FLOW ANALYSIS............................................................................................ 20

Cost of Capital 20

Sales Drivers.. 21

Capital Expenditures ...................................................................................................................... 21

Terminal Valu 22

COMPARABLES ANALYSIS ............................................................................................................... 23

Cross Sectional Du Pont Analysis.................................................................................................. 23

Market Multiples ............................................................................................................................. 24

RECOMMENDATION .......................................................................................................................... 25

EXECUTIVE SUMMARY

According to a popular Turkish proverb, "Coffee should be black as Hell, strong as death

and sweet as love". At Starbucks Coffee Company in Seattle, Washington, it's also as

rich as gold.

Starbucks is a well-managed, aggressive company that has achieved heady growth since

its inception. The company has earned its place in business history as an innovative firstmover

and its brand is synonymous with quality. Nevertheless, after conducting a wide

range of qualitative and quantitative analyses, we see the market's enthusiasm for

Starbucks as a cup that runneth over. On April 25th, Starbucks stock closed at $27-1/2.

Our discounted cash flow model--using baseline assumptions...