Starbucks Valuation ReportPrepared by:

Clay AlmWill Fung

Arman GhorbaniElliot GinsburgKevin Schultz

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Table of Contents:1. EXECUTIVE SUMMARY 2. COMPANY DESCRIPTION 3. ECONOMIC ENVIRONMENT 4. INDUSTRY ANALYSIS 5. EXPLANATION OF VALUATION METHODS 5.1. OVERVIEW OF VALUATION METHODOLOGY5.2. DCF ANALYSIS EXPLANATION5.3. RELATIVE VALUATION PROCESS EXPLANATION6. DCF ANALYSIS 6.1. COST OF CAPITAL 6.1.1. Cost of Debt6.1.2. Cost of Equity6.1.2.1. Beta Calculation: Capital Structure Implications 6.1.2.2. Capital Asset Pricing Model (“CAPM”)6.1.3. Weighted Average Cost of Capital (“WACC”)6.2. GROWTH PROJECTIONS6.2.1. Revenue Growth Rate Calculation6.3. CASH FLOW PROJECTIONS6.3.1. Base Year Revenue Calculation6.3.2. Calculate Revenue Growth Rates6.3.3. Calculate Base Year (2016) FCF 6.4. DCF VALUATION SUMMARY7. RELATIVE VALUATION 7.1. DETERMINING A LIST OF COMPARABLE FIRMS7.2. ADJUSTMENT OF MULTIPLES AND APPLICATION TO STARBUCKS

Index of ExhibitsOutline for Value of Debt CalculationsExhibit A1 Capital IQ: Merged data for Interest Coverage RatioExhibit A2 Debt Ratings by Interest Coverage RatioExhibit A3 Capital IQ: Merged data for Altman's Z-scoreExhibit A4 Debt Ratings by Altman's Z-scoreExhibit A5 Starbucks and competitors' Interest Coverage Ratio and Altman’s Z-scoreExhibit A6 Starbucks' synthetic debt ratingExhibit A7 Starbucks' estimated cost of debt by maturityExhibit A8 Starbucks' estimate the value of debt and debt like commitmentsOutline for Cost of Capital and WACCExhibit B1 CRSP Data - Monthly for 5 years (2010-2015)Exhibit B2 CRSP Data - Weekly for 2 years (2013-2015)Exhibit B3 Summary of Beta Estimates from CRSP DataExhibit B4 Summary Beta Estimates from External SourcesExhibit B5 Leveraging Beta

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Exhibit B6 Ibbotsons DataExhibit B7 Market Risk Premium CalculationExhibit B8 Starbucks' Cost of Equity CalculationExhibit B9 Starbucks' WACC CalculationOutline for Baseline Free Cash FlowExhibit C1 Estimating Baseline Free Cash FlowExhibit C2 Present Value of Lease Payments (2010-2015)Exhibit C3 Change in Working Capital and Capital Expenditure - Comparable FirmsOutline for Growth ProjectionsExhibit D1 Projection of Future Growth Based on Historical GrowthExhibit D2 Growth Projections Based on Analyst Projections & SBUX 2Q 2016 Earnings CallExhibit D3 Simple Growth Model Check on Growth ProjectionExhibit D4 Summary of Growth Projection

1. Executive Summary

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Starbucks Corporation (“SBUX”) is the premier roaster, marketer and retailer of specialty coffee

in the world, operating in 68 countries.1 This report is a comprehensive analysis of SBUX’ valuation

based on our analysis of publically available information. Our valuation of SBUX is based on two

commonly accepted approaches: (1) the discounted cash flow (“DCF”) model; and (2) the relative

valuation model.

Our DCF analysis suggests that the Enterprise Value (“EV”) of SBUX is $90.98B (see exhibit

D5). To reach this value, we first forecast the free cash flows (“FCF”) of SBUX, and then discount

them to present day value based on SBUX’ weighted average cost of capital (“WACC”) over the

corresponding time period. Our 10-year FCF forecast is based on an analysis of historical FCFs to

determine key ratios (see exhibit D5). These ratios were then applied to our analyst informed revenue

projections to extrapolate a future FCF forecast. In addition, we projected a terminal FCF value at

year 2025. The WACC was calculated to be 6.45% (see exhibit D5), based on the company’s 2015

year-end debt and equity costs and ratios. Finally, The 5 year FCF forecast and terminal value were

then discounted by our WACC to determine our estimation of enterprise value.

Cost of Debt

Cost of Equity

Debt Value

Equity Value

WACC

DCF EV

Relative EV

Relative Equity Value

2.63% 6.81% $8.27B $88.88B 6.45% $90.98B $62.95B $62.14B

Our relative valuation analysis returned an enterprise value of $62.1billion (see exhibit E6).

Our relative valuation analysis began with compiling a master list of potentially comparable firms.

Our first step was to generate a list of all companies under the SIC code 5812.  Next we eliminated

firms we believed to be less than adequately comparable based on three key evaluative drivers:

revenue, profitability and growth potential. These elimination metrics left us with a list of 5

comparable firms including: Panera Bread, Cheesecake Factory, Yum Brands, Domino’s Pizza and

Chipotle Mexican Grill. We used the EV/Revenue and EV/EBITA2 ratios of each of these firms to

calculate adjusted revenue multiple and adjusted EBITA multiple. We then applied those multiples to

the relevant SBUX metrics which yielded an average relative enterprise valuation of roughly $62.9

billion. Finally, we added back SBUX’ cash and subtracted its debt which left an average relative

equity valuation of $62.1 billion.

2. COMPANY DESCRIPTION

1 Starbucks 2015 10-K Report2 Earnings Before Interest, Tax, & Amortization

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SBUX, a Delaware incorporate company operates in 68 countries world-wide and boasts to be the

premier roaster, marketer and retailer of specialty coffee in the world, operating in world. SBUX

provides coffee, tea, other beverages to consumers at its retail locations. These locations also increasingly

offer quick service food such as breakfast sandwiches and snacks at company-operated stores (as opposed

to franchised stores). SBUX also generates revenue through the licensing of its brand for retail stores

(franchises) and pre-packaged drinks and coffee offered by third party sellers such as convenience stores

and supermarkets.

3. ECONOMIC ENVIRONMENT Starbucks is widely considered to be a superior good.  Starbucks performs better in a bull market, and

worse in a bear market.  This is likely a direct reflection of public perception of Starbucks as a “premium”

coffee brand – further backed up by the fact that Starbucks’ demand is largely driven by consumers’

disposable income.  There are certainly more affordable places to get coffee, yet Starbucks has

consistently outsold those more affordable coffee brands – due in part to its brand superiority.  The last

five years in particular have seen a consistent bull market as the world economy continues to recover

from the global financial crisis of 2007-2009. During that time, Starbucks has flourished – opening record

numbers of new stores at the same time as growing existing stores’ sales.  Inflation on the US Dollar has

remained relatively constant in recent years, but as the inflation rate increases generally, the purchasing

power of Starbucks’ customers is adversely affected.  Coffee bean prices have been historically

susceptible to periods of volatility. Starbucks in particular purchases large quantities of Arabica coffee

beans, which typically trades at a value slightly higher than standard commodity prices. When the price of

Arabica coffee beans fluctuates, in makes it more difficult for Starbucks to negotiate fixed-price

purchasing commitments for Arabica beans.

4. INDUSTRY ANALYSIS The Quick Service Restaurant industry as a whole grew at an extremely modest 0.9% from 2009 to

2013 as the American economy recovered from the economic shortcomings of 2008 and 2009. However,

the sector has seen growth rates pick up in recent years, and Starbucks has been one of the biggest drivers

of that industry-wide growth.  Analysts typically predict an industry growth rate of roughly 4% over the

next several years. Some of the key drivers of that sustained growth include recovering consumer

confidence, growing levels of disposable income especially in the developed world, widespread adoption

of mobile technology, and a growing demand for healthier food products. Starbucks has prospered as a

result of their commitment to accommodating these industry trends.

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We are conducting this valuation at the tail end of one of the largest economic recoveries in living

memory. We used historical data in several capacities going back five years, to 2011, normalizing various

statistics in this fashion to more accurately determine proper growth rates and projected revenues, among

other forward-looking statistics. Because the last five years have seen exceptional growth for Starbucks,

and Starbucks has seen unprecedented expansion success in recent years, our DCF valuation is likely to

be slightly higher than those conducted in prior years. 

5. EXPLANATION OF VALUATION METHODS 5.1. OVERVIEW OF VALUATION METHODOLOGY

To determine the most accurate valuation of SBUX we employed two independent valuation

analyses: (1) the Discount Cash Flow (“DCF”) Analysis; and (2) the Relative Valuation Analysis. These

independent analyses serve as a check on one another while looking at the company from opposite

perspectives. The DCF form of valuation determines the present value of all expected future free cash

flows; while the Relative Valuation Analysis focuses primarily on the market perception of the company

based on the valuations of comparable companies . To the extent there is a discrepancy between the two

methods, we believe the DCF is more accurate and reflective of the intrinsic value of the company.

5.2. DCF ANALYSIS EXPLANATIONThe DCF Analysis uses future free cash flow projections and discounts by the time value and risk

adjusted value of those cash flows (represented by WACC), to determine the present valuation of a

company. As shown below in Figure 1, the DCF equation is:

Figure 1

PV = CF1 / (1+k) + CF2 / (1+k)2 + … [TCF / (k - g)] / (1+k) n-1

Where:

PV= present value

CFi = cash flow in year i

K = discount rate

TCF = the terminal year cash flow

g = growth rate assumption in perpetuity following the terminal year

n = the number of periods in the valuation model including the terminal year

The application of the above DCF can be conducted in 5 Steps:

STEP 1: Estimate future free cash flow growth rate based on historical information. Historical FCF is

equal to operating cash flows minus capital expenditures (FCF3 = Operating CF– CapEx).

3 The Complete Formula for FCF is FCF = Revenue – COGS – Operating Expenditures – Taxes – Change in Net Working Capital – Net Capital Expenditures

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Historical FCF adjusted for irregular cash fluctuations will provide a justifiable estimate of year-

over-year FCF growth for approximately 10 years.

STEP 2: After the first few years (approximately 10), apply an annual growth rate based on long-term

assumptions of the company, industry, and macro-economic growth dynamics.

STEP 3: Estimate future FCF for each year based on most recent historical FCF and FCF growth rate.

STEP 4: Calculate the Terminal Value. The terminal value is the long-term valuation of FCF for periods

that are so distant that company specific projections are no longer considered accurate or

justifiable. At this point, we assume that the company grows at the rate of the economy in

perpetuity. The terminal value equation is shown below in Figure 2:

Figure 2

Terminal Value = Projected Cash Flow for Final Year (1 + Long-Term Growth Rate) / (Discount

Rate - Long-Term Growth Rate)

Where:

Long-Term Growth Rate = average expected nominal GDP growth rate over the subsequent

years

Discount Rate = the Company’s WACC

STEP 5: Calculate the present value of combined future cash flows to find SBUX’s enterprise value. To

accomplish this, discount each future cash flow by the WACC (i.e. each of the first 5 years

forecast FCF and the terminal value), and then sum them to find the Enterprise Value.

5.3. RELATIVE VALUATION PROCESS EXPLANATIONRelative valuation provides a valuation of the firm based on the comparison of several key metrics

between it and its competitors. The most important step in this process is choosing a comparable set of

firms. To do this, our group determined a set of multiples to form an elimination matrix for selecting

firms. The multiples we used to select our comparable set of firms were premised on firm size, expected

growth, and profitability. 

Our relative valuation analysis can be summarized in 3 phases. First compile a master list of firms

based on common industry.  Identify a series of metrics for the chosen set of multiples to be used as

elimination criteria.  Eliminate firms whose multiples are significantly lower or higher than Starbucks,

such that the ending list of comparable firms closely identifies with the specific Starbucks statistics.

Second, scale the multiples so that they are based on common variables to generate standard values that

are more directly comparable to that of Starbucks. Third, adjust for any differences across the firms in the

identified metrics when comparing their standardized values.  Calculate the enterprise value of the

Starbucks by applying and averaging the relevant metrics to the standard values originally obtained from

the multiples. Finally, calculate an equity value derived from the enterprise value. 

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6. DCF ANALYSIS 6.1. COST OF CAPITAL

This section focuses on SBUX’ cost of capital as calculated by the Weighted Average Cost of

Capital (“WACC”) equation which relies on the company’s: Cost of Debt; Cost of Equity; and the

relative weights of Debt and Equity.

6.1.1. Cost of Debt

The cost of debt is effectively the interest rate a company must pay on all interest bearing debt.

This rate is largely a reflection of two factors: (1) The risk premium - the perceived risk that the company

will default on the loan plus the risk stemming from the duration of the loan; and (2) The risk free rate –

long-term U.S. Treasury Rate.

We estimated the Risk Premium by determining the synthetic debt rating for SBUX by

comparing the company’s key debt ratios of all publically traded companies in North America, excluding

utility and financial companies (collectively the “Market Companies”).4 First, we calculated the Interest

Coverage Ratio (“ICR”) and Altman Z-Score of SBUX and those of the Market Companies. ICR is a

measure of a company’s ability to meet debt obligations, while Altman Z-Score5 measures a company’s

likelihood of bankruptcy within two years using five factors. Next, we compared SBUX’ ICR of 56.46 to

the median ICR of all companies with each respective bond rating7 (AAA through CCC-) to find that

SBUX’ ICR would justify a rating in the range of A- to AAA8 based on an ICR in the top 25% range for

these ratings. The same process was undertaken for SBUX’ Altman-Z Score of 10.79 returning support

for a synthetic debt rating between A- and AAA again as 10.79 exceeded the top ICR for all such ratings

aside from AA.910

SBUX’ preference for renting retail space over purchasing has the impact of distorting its debt

ratios to appear sturdier than they otherwise might if these leases were considered debt. Accordingly, we

recommend the use of professional rating agency Standard & Poor’s that currently rates SBUX as A.11

4 See Exhibits A1 – A4 for complete list of Market Companies and corresponding ratio inputs and calculations. 5 Factors used to calculate the Altman Z-Score are working capital/total assets, retained earnings/total assets, earnings before interest and taxes/total assets, market value of equity/total liabilities, net sales/total assets6 See Exhibit A5 for calculation 7 See Exhibit A2 for summary of median and quartile ICR at each respective rating8 Importantly, given the small number of AAA and AA rated companies the data is accordingly quite sparse and may not be fully representative of the requirements for a company with such a rating.9 See Exhibit A4 for summary of median and quartile Altman-Z Scores at each respective rating. 10 See Generally Exhibit A11 MorningStar

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Pursuant to the Corporate Bond Spreads12 an A rating for a bond with a 20-year maturity

corresponds to a risk premium of 1.73%. This is then added to the corresponding risk free rate of 2.8%,

as given by 20 year U.S. Treasury Yields13. The result is a cost of debt of 4.01% (see exhibit A7). SBUX

has multiple debt obligations that mature at different times; therefore, we matched the four debt maturities

with the relative treasury security rates, determined the cost of debt for each bond, and applied the

effective tax rate to obtain the tax adjusted costs of debt.

Table 1: Tax-Adjusted Costs of Debt Summary

6.1.2. Cost of Equity

The cost of equity is the rate of return required by the company's ordinary shareholders in order

for that investor to bear the risk of holding that company's shares. The required return for this risk can be

calculated by the Capital Asset Pricing Model (“CAPM”), which equals the risk-free rate plus the market

risk premium multiplied by the estimate of the industry’s levered beta.

6.1.2.1. Beta Calculation: Capital Structure Implications

The first step in calculating CAPM is to determine SBUX’ Beta. Beta is a measure of the

company’s systemic risk, or the proportion of risk that a particular company incurs in relation to market

fluctuations. It can be determined by comparing fluctuations in a company’s stock price to fluctuations in

a market index over the same time period (i.e. a regression analysis of the correlation).

We calculated beta using two different methods. First, we calculated beta by performing a

regression analysis based on historical returns on SBUX stock compared against the equally-weighted

return on the S&P 500 Index. Secondly, we compiled betas published by third party financial news

organizations. The same process was completed for varying time periods and increments.14 We then

12 See bondsonline.com13

14 See Exhibit B4

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collected beta estimates from Reuters, Nasdaq, Yahoo, Google and Bloomberg to determine a mean and

median beta estimate of 0.77 and 0.83 respectively.

The next step in calculating the beta for SBUX was to collect the beta from comparable

companies so that the 0.83 median beta could be un-levered. The companies shown in Exhibit B415

(collectively the “Comparable Companies”) were selected because: (1) the companies are all prominent

players in the Quick Service Restaurants (“QSR”) industry; (2) industry analysts frequently benchmark

SBUX against these companies; and (3) each of the companies geographically overlap with SBUX in

some or all markets (most notably McDonalds).

The use of un-levered beta is important because it removes each Comparable Company’s varying

levels of debt. After un-levering beta, we needed to re-lever the beta using SBUX debt to equity ratio to

account for SBUX capital structure. The equation used to un-lever beta is:

Figure 3: Un-Levered BetaUn-levered Beta = Average Estimate of Beta / (1+(1- Effective Tax Rate) * Debt/Equity

Un-Lever SBUX’s Beta16

To un-lever SBUX’s beta and calculate an Industry Average Un-levered Beta, we first calculate

the average estimate of beta for each of the Comparable Companies and SBUX. Second, we determined

the effective average tax rate for Comparable Companies and SBUX, as found in the respective

company’s 10-K filings. Third, Debt-to-Equity Ratio was calculated by taking book value of debt found

in the 2015 10-K over the market value of equity found in Yahoo Finance. Fourth, we solved the Un-

Levered Beta Equation from Figure 3 for each of the Comparable Companies and SBUX based on

figures from the afore mentioned steps 1-3. (See Exhibit B5 for the full results). Finally, we calculate an

Industry Average Un-Levered Beta by taking the average of Comparable Companies’ betas. The resulting

Industry Average Un-Levered Beta is 0.62.17

Subsequently, to re-lever SBUX’ beta we applied the Re-Levered Beta equation from Figure 4

(below) using SBUX’ Debt-to-Equity and Effective Tax Rate (shown above as Average Tax Rate) and the

Industry Average Un-Levered Beta (0.62). The resulting Levered Beta for SBUX was 0.63. (See

Exhibit B5)

Figure: 4: Re-Levered BetaRe-Levered Beta = Avg. Est. of Industry and SBUX un-levered beta * (1+(1- effective tax rate)* Debt/Equity

15 The Comparable Companies are: McDonalds, Wendy’s, Dunkin Donuts, YUM Brands, Chipotle. 16 See Generally Exhibits B4 and B517 See Generally Exhibits B4 and B5

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6.1.2.2. Capital Asset Pricing Model (“CAPM”)The final step in determining the cost of equity requires the application of the CAPM Equation as

shown below in Figure 5. Table 2 demonstrates the components used in reaching the conclusion that

SBUX’ Cost of Equity is 6.81%.

Figure 5: CAPM EquationCAPM (cost of equity) = risk-free rate + (market risk premium * estimate of levered beta)

The assumptions and reasoning for our figures in Table 2 are as follows:

(1) The risk-free rate for equity must be considered over an infinite or perpetual time horizon because

companies theoretically should never dissolve. Thus, we used the 30-year Treasury rate because it

is the longest listed treasury.

(2) The market risk premium is the expected return of the market, over and above the risk-free rate.

To calculate the return on the market we looked at historical returns over the longest period of

time available in the Ibbotson Annual Total Return database (1926-2012). We selected this time

period because it captures the most economic cycles. See Exhibit B6.

(3) For the estimate of levered beta we used the Levered Beta of 0.63 (as calculated above).

Table 2: Starbucks Cost of Equity using CAPM30-Year Treasury (Risk Free Rate) 2.58%Market Risk Premium 6.70%Estimate of Starbuck's Re-Levered Beta 0.6310Cost of Equity (CAPM) 6.81%

6.1.3. Weighted Average Cost of Capital (“WACC”)18

WACC is the weighted average cost of capital where the cost of debt (see section 6.1.1) and cost of

equity (see section 6.1.2) are assigned weights consistent with the company’s debt-to-equity distribution.

WACC dictates the cost of capital that the firm expends for business operations (not including financial

operations) and serves as a vital benchmark in firm decisions of required return for future projects. The

equation for WACC is stated below:

Figure 6: WACC EquationWACC = Cost of debt * (1 – effective tax rate) * (weight of debt) + (cost of equity * weight of equity)

18 See Exhibit B

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The Figure 6 equation was applied to solve for WACC. First calculate the total value of capital

structure by adding the total value of debt and total value of equity. The total value of equity was found

to be $88.88 billion based on the market cap on Yahoo Finance; While the total value of debt was found

by determining the present value of all of SBUX’ current obligations. Upon review of the 10-K, we

estimated these obligations to be approximately $8.266 billion (see Exhibit A-9 for greater detail).

Second, convert total values to proportional weights by dividing each, the total equity, and total debt, by

total value of debt and equity. Our debt and equity weights are 8.5% and 91.5% respectively.

Finally, for the tax-adjusted cost of debt we used the market rate for A- rated, 20-year, corporate debt (see

6.1.1), because the greatest portion of SBUX’ debt has a 20-year maturity. (See also Exhibit B). Table 3

below depicts our findings pursuant to the steps above and the WACC Equation.

Table 3: Starbucks Cost of Capital Calculation (WACC)Tax Adjusted Cost of Debt 2.63%Effective Tax-Rate 34.50%Value of Debt (in Billions) $8.27Cost of Equity (CAPM) 6.81%Market Value of Equity (in Billions) $88.88Weight of Debt 8.50%Weight of Equity 91.50%Weighted Average Cost of Capital 6.45%

6.2. GROWTH PROJECTIONSTo measure SBUX’s growth rate we calculated: (1) the Revenue Growth Rate over the next 10 years,

based on historical growth over the past 5 years; and (2) the Long-Term Growth Rate (2025 and onwards)

based on the average economic growth rate projections provided by the International Monetary Fund

Database.

6.2.1. Revenue Growth Rate Calculation

To calculate Revenue Growth rate we considered multiple methods for estimating the growth rate

including: (1) average historical revenue growth rate; (2) average analyst expected growth rate; (3) SBUX

management earnings guidance from the 2Q 2016 earnings call; and (4) a Store-Based Revenue

Forecasting Model. (See Exhibit D)

Average Historical Revenue Growth Rate

To calculate average historical Revenue Growth Rate first collect historical revenue information.

These can be calculated by analyzing 10-Ks from the previous years. We chose to analyze the past 5

years, because we felt these accurately reflected SBUX’s post-financial-crisis growth. Second, calculate

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the average growth rate by taking the average of this data. As shown in the table below, we arrived at an

average growth rate of 13.1% year-over-year.

Consensus Analyst Expected Growth Rate

To calculate Consensus Analyst Expected Growth Rate obtain analyst revenue projections for

SBUX over the coming years and calculate the consensus average over the coming years. For SBUX this

average is 10% yr/yr from 2016-2018.

Management Growth Expectorations

To obtain SBUX management’s latest revenue growth projections we reviewed the transcript

from recent earnings call. During the call, management spoke to an expected top-line growth of 10-12%

in the coming year.19

Store-Based Revenue Forecasting Model

The Store-Based Revenue Forecasting Model is based on detailed revenue projections for 2016,

as explained below in Section 6.3.2 Base Year Revenue Growth Rate. The Store-Based Revenue Forecast

Model returns a growth rate of 14.37%. (See Exhibit D3)

Summary of Short-Term Revenue Growth Rate Methods

Based on the 4 revenue growth projections above, we chose to apply the Store-Based Revenue

Forecasting Model because we believe a comprehensive analysis of store revenues provides the most

objective and quantifiable estimate of 2016 revenues and consequently the most accurate growth

projection. Further results of the other methods were not substantially different from this method, thus

supporting the Store-Based Revenue Forecasting Model. Table 4 below summarizes the results of the

different short-term growth models.

Table 4: Summary of Starbucks Revenue Growth RatesHistorical Growth

MeanAnalyst Growth

Mean Economic Growth RateAvg Growth per

Store13% 10% 3.94% 13.10%

Long-Term Growth Rate

To calculate the Long Term Growth Rate we gathered Real GDP percent change projections from

the International Monetary Fund Database. We then increased these projections by expected inflation

rates from the same source to arrive at annual Nominal GDP projections as shown in Table 5 below. The

Average Long-Term Growth rate we calculated was 3.94% per year.

Table 5: Long-Term Growth Rate Summary (Economic Growth Rate)

19 www.seekingalpha.com/article/3967223-starbucks-sbux-howard-s-schultz-q2-2016-results-earnings-call-transcript

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Real GDP % Change + Inflation % Change = Avg Economic Growth Rate2.25% + 1.69% = 3.94%

Combining Revenue Growth Rate and Long-Term Growth Rate

To determine revenue growth over the entire 2016 to 2025 period and beyond we combined the two

growth rates calculated above using a straight-line declining growth rate method. Based on a projected

growth rate in 2016 of 13.1% (see above) and a long-term growth rate of 3.94% in 2025 and beyond, we

estimated that SBUX’s growth rate would decline evenly over the 10-year period as shown in Table 6

below. While this is extremely unlikely to be the case we believe it is the most accurate approximation

over a lengthy 10 year period given the countless unpredictable macro and micro economic events that

could occur at any time over the 10 year period.

Table 6: 2016 to 2025 Estimated Revenue Growth and Growth Rate2016 Projected Revenue Growth Rate Terminal Year Revenue Growth Rate

14.37% 3.94%

6.3. CASH FLOW PROJECTIONSFree Cash Flow (“FCF”) represents the cash that a company is able to generate after laying out the

money required to maintain or expand its asset base (generally operations and non-financial activity).20

FCF can also be seen as the cash available to security holders after the cost of operations.

To calculate FCF we: (1) calculated the Base Year Revenue as an estimate dependent on historical

revenues; (2) calculated Revenue Growth Rate based on store sales projections; and (3) calculated Base

Year FCF based on estimated revenue. The equitation for FCF is shown below in Figure 7.

Figure 7FCF = (EBIT +/- one-time cash flows) (1-Tax Rate) - Change in Net Working Capital – Net Capital Expenditure

6.3.1. Base Year Revenue CalculationTo calculate Base Year Revenue first calculate the average growth in number of New Stores

opened each year, based on historical data over the past 5 years, as drawn from the 10-K. Table 7 below

shows the calculation of an average opening of 8% of new stores each year.

Table 7: Summary of Average Growth in Number of New Stores Table_: Growth in Stores

Company Operated Licensed Stores All New Stores Avg.7.96% 7.97% 7.96%

Second, calculate the average revenue per store, which we found to be $769,811 per year. Third,

calculated the average revenue growth in Same Store sales based on historical growth in same store sales

over the past 5 years. The average revenue growth in same store sales was found to be 7% per year. (See

20 See http://www.investopedia.com/terms/f/freecashflow.asp

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Exhibit D3.) Fourth, multiply the average growth rate in same store sales by prior year revenue to solve

for 2016 Base Year projected revenue. Fifth, calculate the expected revenue provided by New Stores in

Base Year by multiplying the average revenue per store by the number of New Stores expected (Average

Growth of number of New Stores multiplied by the number of stores in 2015 and subtract 1). The sum of

the fourth and fifth steps is Base Year Revenue, which is estimated to be $21.917 billion.

6.3.2. Calculate Revenue Growth RatesTo calculate Revenue Growth Rate we determined the percent change in revenue from 2015 to

the expected Base Year revenue calculated in Step 6 of Section 6.3.1 above. Table 8 below summarizes

our findings of a Base Year Revenue Growth Rate of 14.37%.

Table 8: Starbucks Revenue Growth RateFY 2015 FY 2016

Revenue (in millions) $19,162.70 $21,917.17Change in Revenue (in millions) $2,714.90 $2,754.47Revenue Growth Rate 16.51% 14.37%

6.3.3. Calculate Base Year (2016) FCF To Calculate the FCF for Base Year FCF calculate EBIT in 2015 as shown in Table 9 below.

Table 9: Operating Income (EBIT)FY 2014 FY 2015

Net Sales $16,447.80 $19,162.70COGS $6,858.80 $7,787.50Gross Profit $9,589.00 $11,375.20Operating Expenses $6,776.20 $8,024.10EBIT (Operating Income) $2,812.80 $3,351.10

Then add one-time cash flows, any financial expense that is listed as an operating expense, and any

investing expense listed as an operating expense to 2015 EBIT. Then subtract taxes to arrive at 2015

NOPAT as shown in Table 10 below.

Table 10: Net Operating Profit After Taxes (NOPAT)FY 2014 FY 2015

EBIT $2,812.80 $3,351.10+/- One-time Cash Flows $100.75 $112.08Operating Income $2,913.55 $3,463.18Taxes (34.5% Tax Rate) $1,005.17 $1,194.80NOPAT $1,908.37 $2,268.39

Calculate Base Year NOPAT by multiplying the Base Year Revenue Growth Rate (14.37%) by 2015

NOPAT. The Base Year NOPAT is $2.594 billion.

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Net Capital Expenditures & CapEX

Calculate Net Capital Expenditure (“Net CapEx”) by subtracting deprecation and amortization from

current year’s capital expenditures. Then add/subtract the abnormal acquisition costs21. Then add the

change in value of leases. Then add any investment expense listed as an operating expense to arrive at Net

CapEx. Subsequently, calculate Base Year Net CapEx by multiplying the Base Year Revenue Growth

Rate (14.37%) by the 2015 Net CapEx from 2015.

Change in Net Working Capital

The calculation of the change in net working capital is based on two components: (1) non-cash

working capital; and (2) cash working capital. Non-cash working capital is comprised of inventory,

adding accounts receivable and subtracting accounts receivable. Based on rule-of-thumb, cash working

capital is 3% of change in revenue. Then Calculate Base Year change in working capital by first

determining the 2015 change in network working capital as a percentage of revenue for 2015 and then

multiply by the Base Year Revenue Growth Rate.

Table 11: Starbucks Net Working Capital (values in millions)FY 2014 FY 2015

Inventories $1,090.90 $1,306.40Accounts Receivable $631.00 $719.00Accounts Payable -$533.70 -$684.20Cash Working Capital $47.43 $81.45Net Working Capital $1,235.63 $1,422.65Change in NWC $187.02

Finally, to calculate Base Year FCF, subtract Base Year Net CapEx (Step 5) and change in

working capital (Step 7) from Base Year NOPAT (Step 3). Table 12 summarizes our finding that Base

Year FCF is $1.69 billion.

Table 12: Free Cash Flow at Base Year 2016NOPAT $2,594.45Net Cap Ex ($877.43)Change in NWC ($26.88)Free Cash Flow $1,690.14

6.4. DCF VALUATION SUMMARYGiven FCF for Base Year and Combined Growth Rates we calculated the DCF enterprise value

valuation for SBUX. To calculate the DCF valuation first, discount Future Free Cash Flows from to

present value using the WACC rate (6.45%). Second, calculate the Terminal Value of SBUX using the

Long-Term Growth Rate. To calculate Terminal Value we applied the perpetual growth formula in

Figure 8. The results are displayed below in Table 13.

21 Abnormal Acquisition costs are defined as acquisition costs that deviate from the standardized acquisitions cost as calculated by looking at the average acquisition costs over the prior 5 years.

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Figure: 8

PV of Perpetuity = FCF2025 / (WACC – g)Where: g = perpetual growth rate (see Long-Term Growth Rate)

Table 13: Present Value of All Future Free Cash FlowsDCF Enterprise Value

Terminal Value FCF Discount Rate Enterprise Value129.09B 6.45% 90.98B

Once the values of FCF and Terminal Vale are found it is necessary to discount them to present

value. Discount the Terminal Value of $129,029 million to present value applying the WACC rate of

6.45%. This results in a Present Terminal Value of $69,081 million. See Exhibit D5 for greater detail.

Finally, combine Present Value of FCF and Present Terminal Value to determine SBUX’s Enterprise

Value of $90,982 million, as summarized in Table 14 below.

Table 14: SBUX Enterprise Value Calculation SummaryPV of FCF (2015 - 2025) PV of TV EV

21,901.23 + 69,081.43 = 90,982.66

7. RELATIVE VALUATION 7.1. DETERMINING A LIST OF COMPARABLE FIRMSOur first step in determining an accurate valuation for Starbucks through a comparative analysis

method was to compile a master list of all corporations in a similar industry to Starbucks. We did this by

looking up all companies with the SIC code: 5812. SIC codes are a four-digit code that indicates what

specific industry a company operates in. All of the entities with the code 5812 come under the heading of

Food Service, or Quick Service Foods. Creating a list of comparable firms based on SIC code is a

reasonable place to start because each of these companies typically encounter similar industry trends,

greater economic changes, and even supply constraints. After looking over our list, our group decided to

include a couple additional firms based on professional analysts’ reports, excluding private firms and

firms operating in alternative sectors. In all, our initial list had over 70 companies. (see appendix … chart

of full comparables list)

Our next step was to begin to narrow our list down

so that our revised list would contain companies more closely aligned with Starbucks in terms of three

key comparative metrics: gross revenue, profitability, and growth potential. Our first step was to

eliminate companies from our list that had annual gross revenues of less than $2 billion. It was important

to use the size of the company, as measured by revenue, when determining a list of comparable firms

because smaller companies do not have the same responsibilities or scale, and larger companies are often

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times not competing in the same area as the company in question targets. This revenue-based elimination

process brought our list down to 14 remaining companies.

Our group then proceeded to eliminate several of the remaining companies based on profitability. We

measured profitability based on each company’s EBIT margin. EBIT is a good indicator of profitability

from core business operations. We wanted to measure the comparable value of Starbucks based off of

companies that had similar EBIT margins to Starbucks and therefore experienced roughly the same level

of effectiveness in turning a profit. We determined that companies with an EBIT margin of greater than or

less than 10% away from Starbucks should be eliminated from the list of comparable firms. The EBIT

margin metric was responsible for eliminating another 8 firms from our master list.

We then completed a similar process for each remaining company’s expected growth rates as

measured by their year over year growth – as taken from their respective 10k filings with the SEC for

2015. Growth potential is generally regarded as one of the more pertinent drivers of overall company

value due to its natural relationship with future cash flows. We determined that we would eliminate

companies from our list if they had a growth rate of greater than or less than 10% away from the growth

rate of Starbucks. This only eliminated one remaining firm (Brinker International), and left us with an

objective list of 5 comparable firms.

Criteria: >$2 Billion in RevenuesCompany Name Revenue ($mm)

STARBUCKS CORP $19,163

Criteria: +/- 10% of SBUX Gross MarginCompany Name Gross Margin

STARBUCKS CORP 28.40%

Criteria: +/- 10% of SBUX Revenue GrowthCompany Name Revenue Growth

STARBUCKS CORP 12.37%

Adjustments Based on Median CompsMedian Comp Adjustment

Revenue (mm) $2,681.58 10.00%EBITA (mm) $405.44 N/AEBITA % of revenue 15.21% 5.00%Revenue Growth 7.19% 5.00%Total Adjustment: 20.00%

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7.2 ADJUSTMENT OF MULTIPLES AND APPLICATION TO STARBUCKS

The final five firms we built our comparable metrics on ended up as: Yum! Brands, Chipotle Mexican

Grill, Panera Bread, Domino’s Pizza and Cheesecake Factory. Once we had established our list of

comparable firms, we used their metrics to determine median multiples for growth, profitability and

revenue. It is important to convert market values of companies to standardized values to enable a like to

like comparison. To do this we converted the market values to enterprise values using the enterprise value

formula (insert formula). After converting to enterprise value we used that value to establish a series of

multiple ratios that we would then use to adjust Starbucks’ value based on the size, growth potential and

profitability of its comparable firms. Each of these EV multiples, given as EV/Revenue (for company

size), EV/EBITA (for profitability), will tell us how much to adjust the respective metrics for Starbucks.

We took the median adjusted EV/Revenue values which gave us a multiple of 3.05 for adjusted

EV/Rev and that yielded an Enterprise Value based on Revenue Multiple of $58.452 billion. We then

took the adjusted EV/EBITA ratio which gave us a multiple of 20.06 for adjusted EV/EBITA which then

yielded an Enterprise Value based on EBITA Multiple of $67.453 billion. We averaged those two figures

to determine an Average Relative Enterprise Value of $62.953 billion. Finally, we determined an Equity

Value for Starbucks Corp., by subtracting out Total Debt and adding back Cash, which yielded an Equity

Value of $62,135 billion through comparable metrics.

Relative ValuationEnterprise Value (Revenue Multiple) $58,452.30Enterprise Value (EBITA Multiple) $67,453.04Average Relative Enterprise Value $62,952.67Equity Value $62,135.27Equity Value per Share $42.56

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Adjusted EV Multiples Based on Median CompsEV Multiples Median CompEnterprise Value ($mm) $7,651.82EV/Rev 2.54EV/EBITA 16.71Adj. EV/Rev 3.05Adj. EV/EBITA 20.06