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Valuation of Starbucks Using Residual Enterprise Income

Valuation of Starbucks Using Residual Enterprise Income. Mitchell Schmitt. 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

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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. 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

  3. 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

  4. 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

  5. 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

  6. REI= EPATt- rent * NEAt-1 • Valuation uses parsimonious forecasts previously calculated • REI is income in excess of that required given a company’s asset level and WACC • More accurate than FCF model due to predictions based on accounting information

  7. Two parts of value • Present Value of Forecasted REI • Continuing Value [REI *(1+g)/ (rent-g)]/ (1+rent)t • Sum is equal to enterprise value

  8. Valuation Using Residual Enterprise Income

  9. Valuation Using DCF Model

  10. Inputs

  11. Questions?

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