*Article updated on December 13, 2020*
To start off our analysis of the opportunity the lies in Starbucks Corporation (NASDAQ:SBUX), here are some of the basic details every investor should know before investing in Starbucks stock:
Sector: Consumer Cyclical
Industry: Restaurants
Market Capitalization: $120.05 billion
Shares Outstanding: 1.17 billion
Headquarters: Seattle,
WA
Company Established: 1985
Current CEO: Kevin R. Johnson
Starbucks Corporation (NASDAQ:SBUX) in Detail
Starbucks is the premier roaster, marketer, and retailer of specialty coffee around the world, operating in over 80 markets. Starbucks also sells a variety of coffee and tea products, and licenses its trademarks through other channels such as licensed
stores and through their Global Coffee Alliance with Nestle S.A. Starbucks also sells good and services under the following brands: Teavana, Seattle’s Best Coffee, Evolution Fresh, Ethos, and Starbucks Reserve. Starbucks aims to maintain
its title as the most recognized and most respected brands in the world, and to continue its rapid expansion by adding additional stores in both existing and developed markets (such as the U.S.) and in newer, higher growth potential markets (such
as China).
Starbucks has three reportable operating segments: Americas (including the U.S., Canada and Latin America), International, and Channel Development. Segment revenue as percentage of total revenue looks like this: Americas with 70%, International with 20%, and Channel Development with 8%.
During Starbucks' fiscal 2020 year, revenue from company operated stores accounted for 81% of total revenue. The company’s objective is to be the leading retailer and brand of coffee and tea by selling the finest quality products and providing each customer with a unique experience The unique experience is geared to be built on superior customer service, convenience, and a seamless digital experience. Starbucks stores are often located in high-traffic locations. The stores vary in size and format and, thus, can be flexible in the types of locations. Since the beginning of the Covid-19 pandemic, Starbucks has introduced a new store format known as Starbucks Pickup. This new format as created in order to serve the new market demand for to-go ordering, and also take advantage of the major change in consumer behavior.
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Revenues from licensed Starbucks stores accounted for 10% of total net revenue in Starbucks' 2020 fiscal year. Licensed stores typically have a lower gross margin and a higher operating margin than company operated stores. Under the licensing model, Starbucks
receives a margin on branded products and supplies sold to the licensed store operator, along with a royalty on the retail sales of the product.
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Starbucks controls all coffee purchasing, roasting, and packaging and the global distribution of coffee used in its operations. This gives Starbucks the ability to control the quality of their product and to ensure that the product supply is in compliance
with their rigorously high standard.
The price of coffee is subject to significant volatility, as it is impacted by supply and demand at time of purchase, as well as the trading activities in the Arabica coffee futures market. The supply of coffee can be impacted by factors in the producing
countries such as natural disasters, corporate disease, and political and economic conditions. Starbucks has a long-lasting and strong relationship established with most of its suppliers. This brings the risk of non-delivery on purchase commitments
close to zero. Starbucks also operates nine farmer support centers that are staffed with agronomists and sustainability experts who work with coffee farmers to improve both quality and yields. Starbucks' business model experiences moderate seasonal
volatility, and its revenues in the second quarter are typically lower than the remainder of the year.
Starbucks' primary competitors in the coffee and tea marketplace are other specialty coffee and tea shops. Starbucks also experiences direct competition from large companies in the fast-food restaurant sector, and the ready-to-drink coffee beverage
market. The products sold through Starbucks' channel development segment compete directly against specialty coffees and teas sold in grocery stores, specialty retailers, and convenience stores.
As far as risks go, Starbucks' operations have been disrupted, and will continue to be disrupted to some degree, due to the Covid-19 pandemic. The virus is unpredictable and the duration and scope of the pandemic are currently unknown.
Starbucks’ potential failure to preserve the value of its brands could have a negative impact on its overall financial results, as the company's success depends largely on the sustainability of its brand. The company’s future growth relies on the ability of its business partners to implement Starbucks’ growth platforms and product innovations. At this time, Starbucks' partners have also been impacted by the Covid-19 pandemic.
Starbucks is highly dependent on the performance of its operating segment in the Americas, which represented around 70% of the company's total net revenue in the fiscal year of 2020. Also, the Americas segment was reportedly the most efficient
in terms of cash flow generated, thus any type of slowdown here could result in significantly reduced cash flow overall.
Starbucks Stock Dividend Information
Starbucks stock has a current dividend yield of 1.76%. The company’s dividends per share have been stable, and have been consistently growing over the past 10 years. SBUX dividends in three years are forecasted to be covered by earnings, or a 58% payout ratio, even though SBUX dividends are not well covered at the moment with a 212% payout ratio.
Who is the Chief Executive Officer, or CEO, of Starbucks Corporation (NASDAQ:SBUX)?
Mr.Kevin R. Johnson has been the CEO of Starbucks Corporation (NASDAQ:SBUX) since April of 2017, and Mr. Johnson has been the company president since March of 2015. From January of 2007 to September of 2008, Mr. Johnson was named President of the
Platforms & Services Division of Microsoft (MSFT), where he led an organization of over 14,000 employees. Alongside Bill Gates, Steve Ballmer, and seven other key senior executives, Mr. Johnson served on the Senior Leadership Team that set
overall strategy and direction for Microsoft. Johnson is a founding member of the board of directors at Npower, a nonprofit organization whose mission is to help other nonprofits use technology to expand the reach and impact of their work. Mr.
Johnson came to Starbucks Corporation with extensive experience in the technology industry. The reported compensation of Kevin R. Johnson is currently $19.24 million annually.
The Shareholder Structure of Starbucks Corporation (NASDAQ:SBUX)
Technical Analysis of Starbucks Stock
Starbucks stock has been on an uptrend since March of 2020. After each upward push, SBUX pulled back to the support line drawn on the chart below.
As of right now, it is likely that Starbucks stock price is going to pull back in the upcoming weeks, but SBUX may not get as close to the previous support line as it had before. Starbucks stock has a lot of momentum behind it right now. This momentum is primarily fueled by positive investor sentiment lately regarding the Covid-19 vaccine developments.
Looking at the relative strength index (RSI), Starbucks stock is currently overbought. With that in mind, it would be advisable for investors to watch for SBUX to pull back before investing in Starbucks stock.
Financial Analysis of Starbucks Corporation (NASDAQ:SBUX)
The following table shows the 3-year averages of the following metrics: total revenue, net income, operating cash flow, and free cash flow. Free cash flow is calculated by subtracting capital expenditures from cash flow from operations.
The following table shows the consolidated balance sheet for Starbucks Corporation, comparing fiscal 2020 to fiscal 2019 in terms of assets, liabilities, and equity.
| | September 29, 2019 | | September 27, 2020 |
| | |
| ASSETS |
| Current assets: | | | | |
| Cash and cash equivalents | $4,350.90 | | $2,686.60 |
| Short-term investments | $281.20 | | $70.50 |
| Accounts receivable, net | $883.40 | | $879.20 |
| Inventories | $1,551.40 | | $1,529.40 |
| Prepaid expenses and other current assets | $739.50 | | $488.20 |
| Total current assets | $7,806.40 | | $5,653.90 |
| Long-term investments | $206.10 | | $220.00 |
| Equity investments | $478.70 | | $396.00 |
| Property, plant and equipment, net | $6,241.40 | | $6,431.70 |
| Operating lease, right-of-use asset | $8,134.10 | | $0.00 |
| Deferred income taxes, net | $1,789.90 | | $1,765.80 |
| Other long-term assets | $568.60 | | $479.60 |
| Other intangible assets | $552.10 | | $781.80 |
| Goodwill | $3,597.20 | | $3,490.80 |
| TOTAL ASSETS | $29,374.50 | | $19,219.60 |
| LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) |
| Current liabilities: | | | | |
| Accounts payable | $997.90 | | $1,189.70 |
| Accrued liabilities | $1,160.70 | | $1,753.70 |
| Accrued payroll and benefits | $696.00 | | $664.60 |
| Income taxes payable | $98.20 | | $1,291.70 |
| Current portion of operating lease liability | $1,248.80 | | $0.00 |
| Stored value card liability and current portion of deferred revenue | $1,456.50 | | $1,269.00 |
| Short-term debt | $438.80 | | $0.00 |
| Current portion of long-term debt | $1,249.90 | | $0.00 |
| Total current liabilities | $7,346.80 | | $6,168.70 |
| Long-term debt | $14,659.60 | | $11,167.00 |
| Operating lease liability | $7,661.70 | | $0.00 |
| Deferred revenue | $6,598.50 | | $6,744.40 |
| Other long-term liabilities | $907.30 | | $1,370.50 |
| Total liabilities | $37,173.90 | | $25,450.60 |
| Shareholders’ deficit: |
| Common stock ($0.001par value) — authorized, 2,400.0 shares; issued and outstanding, 1,173.3 and 1,184.6 shares, respectively | $1.20 | | $1.20 |
| Additional paid-in capital | $373.90 | | $41.10 |
| Retained deficit | -$7,815.60 | | -$5,771.20 |
| Accumulated other comprehensive loss | -$364.60 | | -$503.30 |
| Total shareholders’ deficit | -$7,805.10 | | -$6,232.20 |
| Noncontrolling interests | $5.70 | | $1.20 |
| Total deficit | -$7,799.40 | | -$6,231.00 |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) | $29,374.50 | | $19,219.60 |
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Quantitative Analysis of Starbucks Stock
(NOTE: Ratios are Calculated Based on Fiscal 2019 Data)
Liquidity Ratios
Sales to Working Capital: 51.70 (the sales to working capital ratio is relatively high, which is an indication that the company doesn’t hold enough current assets)
Operating Cash Flow to Current Maturities: 1.28
Working Capital: $459.6 million
Quick Ratio: 0.75
Current Ratio: 1.06
Interest Coverage Ratio: 3.57
Cash Ratio: 0.59
Profitability Ratios
Gross Margin: 67.28%
Operating Margin: 6.64%
Net Margin: 3.95%
Return on Assets: 3.82%
Return on Equity: -11.89%
Return on Invested Capital: 5.27%
Valuation Ratios
Dividend Paid Per Share: $1.61
Dividend Yield: 1.76%
Price-Earnings Ratio: 129.2 (Starbucks has a high P/E ratio compared to the industry average of 36.8 and the market average of 19.8)
Operating Cash Flow Per Share: $1.36
Discounted Cash Flow (DCF) Analysis for Starbucks Stock
For the DCF analysis below, we used the following: an intermediate growth rate of 10%, a long-term growth rate of 4.5%, and a discount rate of 10.94%.
Based on the DCF valuation model employed here for Starbucks Corporation (NASDAQ:SBUX), Starbucks stock is currently significantly overvalued. It is important to note that investment decisions should never be based solely on any single type of analysis,
and especially just based on a single valuation analysis. Doing as much research as possible and consulting with investment professionals is always highly recommended when considering the purchase of a stock. Further, the DCF is not always the
best method to calculate the intrinsic value of a stock.