Introduction:

SBUX is the most recognized coffee chain globally, serving up millions of coffee daily. SBUX has been dominating the specialty market and continues to be the largest player in the market, largely due to the branding that SBUX has built. However, recently, SBUX’s overall revenue has been down due to a fall in same-store sales, partially offset by net new store growth. This decline in same-store sales is heavily attributable to the NA and China markets. With multiple issues such as consumers trading down and strong rivals such as Luckin Coffee and Dunkin' competing for SBUX's market share.

Market:

Australia
SBUX opened up too quickly in Australia, not giving Australian consumers time to adapt and develop an appetite for SBUX. SBUX Australia also tried to copy and paste the coffee culture that worked in America to Australia, leading to a lack of personalization to local taste buds. There was also a strong competitor, Gloria Jeans that did the exact opposite of SBUX. They opted for slower more organic growth to show respect to the coffee culture of Australia. This led to the locals being more fond of Gloria Jeans and that combined with the cheaper prices of Gloria Jeans eventually gave Gloria Jeans the lead over SBUX.

China
One of the largest markets in which SBUX operates is the Chinese market. SBUX has managed to integrate very well into the Chinese market especially because the Chinese market has a very strong tea drinking culture. In China, SBUX is seen as a luxury item given the high prices that SBUX charges relative to citizens' income. SBUX is even seen as a status symbol as consumers would carry their SBUX cups and display them in public as a way of showing off. However, SBUX has run into a very strong local competitor “Luckin Coffee”. Luckin Coffee has been able to pursue very rapid growth in part due to its lean business model, opting for a smaller store size and for consumers to be able to complete the entire transaction through the app. This has allowed Luckin to employ a lesser number of employees, achieve higher margins, and reinvest more back into the business. China is a market that places heavy emphasis on novelty, people would like to buy new trendy things to flaunt.

Revenue:

Overall
SBUX plans to pick up business in NA through initiatives such as “Morning Daypart”, better value offerings, and newer product innovation.

Morning Day Part
Morning Daypart is when SBUX is the busiest and a very significant chunk of their revenue comes from here. SBUX noticed that 60% of orders from this part of the day are through mobile orders, however, there is a large cart abandonment rate due to customers being unwilling to wait. SBUX plans to resolve this by increasing operational efficiency by increasing the usage of machinery and product availability (Popular products out of stock). SBUX also believes that there are other parts of the day with untapped potential such as overnight from 5 pm to 5 am and weekends (when families usually would visit).

Better Value Offerings
SBUX also hopes to increase the value of being a Starbucks Rewards member through initiatives such as In-app offers and a better wait time algorithm, they hope that through these initiatives SBUX can convert the “Occasional Consumer” into a loyal customer. Plus, the data collected from Starbucks Rewards can be processed by SBUX’s machine learning algorithm, Deep Brew AI allowing for a more personalized experience.

Newer Product Innovation
SBUX hopes that through new product innovation, it can attract a new demographic of customers and retain existing customers. It plans to half its innovation pipeline from 12 to 18 months, introduce a new zero-sugar energy drink, and healthier options such as lower calories on existing products or plant-based options.

Company Operated
When forecasting Company Operated Stores, I believe that SBUX’s “Purpose Driven” growth means that SBUX will not pursue rapid store count expansion due to the lack of suitable talent. SBUX’s innovations in machinery will allow it to mitigate this lack of suitable talent, however as SBUX is a specialty coffee where consumers are paying a premium for the experience of witnessing a skillful barista brew a high-quality cup of coffee, I believe that company-operated stores will not experience very rapid growth for SBUX to have the right balance between human talent and machinery. In my base case, I forecast SBUX to grow slightly lower than the historical rate to avoid cannibalizing profits and diluting SBUX’s brand value. However, SBUX has a growth plan for emerging markets, but I argue that SBUX charges a very high premium for its products to be appealing to locals.

When forecasting Revenue/Store, given the current tough macro-environment I believe that slower growth will persist for the next 2 years for the macro-environment to have any meaningful improvement, increasing the likelihood that consumers will be more willing to purchase luxury goods such as SBUX. I believe that SBUX has slight pricing power due to the unique nature of its products allowing it to raise prices to a limited extent and the increasing chances of reaching a larger audience which translates into higher transaction volume. On top of that, I believe that SBUX’s constant innovation and promotion of their food attach will increase total ticket size. In perpetuity, I forecast that Revenue/Store will grow in line with the perpetual inflation rate. 

Licensed
When forecasting %Franchised, according to Howard Schultz “It would have been hard to provide the level of sensitivity to customers and knowledge of the product needed to create those Starbucks values if we franchised.”(~SOURCE~) this shows that SBUX maintains very stringent QC and criteria for their licensee. However, given that SBUX is very reliant on its Chinese licensee due to local laws in China, plus China is a huge part of SBUX’s future growth plans. I forecasted %Franchised to taper slightly downwards with respect to historical averages.

When forecasting Revenue/Store, given that SBUX has a very stringent QC process and is very selective about their licensees, it gives SBUX high bargaining leverage that translates into high pricing powers. I believe that Revenue/Store will grow at an elevated rate before tapering to grow in line with the perpetual inflation rate. However, this rapid growth rate is moderated by SBUX ensuring that it does not reduce the economic viability of a Starbucks Store through excessive profit-sharing arrangements.

Others
Others refer to other items sold by SBUX such as serveware and ready-to-drink beverages. Given that the success of Others is hinged on SBUX’s stores, opting for less granularity I forecasted it as a % of total store sales.

Cost:

COGS
When forecasting COGS, given that SBUX has a mature supply chain where there is less room for significant swings in costs. So, opting for less granularity I forecasted it as a % of historical averages. 

Store Operating Expense
When forecasting Store Operating Expense, I believe that SBUX’s initiatives to improve efficiency through Machinery and Digitization of their stores will allow SBUX to enjoy cost savings over time. 

Others
When forecasting Others, opting for less granularity I forecasted it as a % of historical averages. 

G&A
When forecasting G&A, given that SBUX has proactively raised wages and reinvested back into its employees through multiple initiatives such as sponsoring online degrees, stock ownership, and comprehensive health insurance. I believe that G&A will increase over time due to these initiatives.

CapEX and D&A:

CapEX

When forecasting CapEX, taking into account “We expect our capex in fiscal year 2024 to be approximately 3 billion… targeting an approximate 50% dividend payout ratio” – 2023 Q4 Earnings conference.

D&A

When forecasting D&A, opting for less granularity I forecasted it as a % of historical averages.

WACC:

10Y T Bond Yield (1M Avg) = 4.25%
Beta (~SOURCE~) = 0.94
Stable Market ERP (~SOURCE~) = 4.60%
COE = 8.57%
SBUX is rated “BBB”
COD (1M Avg) = 5.54%
Marginal Tax Rate = 21.00%
AT COD = 4.38%

Stock Price (5D Avg) = $77.11
Shares O/S = 1136.7M
Market Value of Equity = 87650.94M
Weighted Average Maturity of Debt = 10 Years
FY23 Interest Expense = 550.1M
Market Value of Debt = 14509.32M

%Debt = 14.20%
%Equity = 85.80%
%WACC = 7.98%

Conclusion:

Ultimately in my base case, I value SBUX at $65.74 per share. I believe that despite the recent poor financial results which reduced SBUX's stock price by ~14%, the stock price is still overvalued. I believe that investors are overly fixated on the high AUV and low payback of each new store opened, they believe that SBUX can maintain this high AUV for every subsequent location it opens in. However, I do not believe that this historic number can be maintained over time. The reason is that the initial locations were deliberately picked because they had very high potential for high AUV, however as opportunities for potentially high AUV locations dry up, SBUX's AUV will decline. And, there is a very large risk of cannibalizing profits amongst SBUX chains.

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