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Company Analysis TEAM NUMBER: 17 FINANCIAL MANAGEMENT (SECTION 2109) ADRIAN AIZENSTAT MATT FLUHARTY WESLEY JONES JOHN LITHGOW JARROD SCHILLING

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Agenda <ul><li>Economic Climate </li></ul><ul><li>Industry analysis </li></ul><ul><li>Firm Analysis </li></ul><ul><li>Overview </li></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Other Issues </li></ul></ul><ul><ul><li>Detailed Financial Analysis </li></ul></ul><ul><ul><li>Financial Comparison to Industry </li></ul></ul><ul><ul><li>Potential Consequences of Future Economic Conditions </li></ul></ul><ul><ul><li>SWOT Analysis </li></ul></ul><ul><li>Intrinsic Value of Stock </li></ul><ul><li>Overall Summary </li></ul>

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Economic Climate <ul><li>Past </li></ul><ul><ul><li>Dot-com and Tech Stock “Bubble” </li></ul></ul><ul><ul><li>September 11 th Attacks </li></ul></ul><ul><ul><li>2003 Tax Cuts </li></ul></ul>

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Economic Climate <ul><li>Present </li></ul><ul><ul><li>National Debt </li></ul></ul><ul><ul><li>Increasing National Security Costs </li></ul></ul><ul><ul><li>$400 Billion Spent on Military efforts since 2003 </li></ul></ul>

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Economic Climate <ul><li>2007 Growth Rate – 2.2% </li></ul><ul><ul><li>Lowest in 5 years </li></ul></ul><ul><li>2008 Presidential Election </li></ul><ul><ul><li>Tax Policy </li></ul></ul><ul><li>War in Iraq </li></ul>

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Industry analysis <ul><li>Operates within the Specialty Eateries Industry </li></ul><ul><ul><li>Composed of companies that “own, operate, and/or franchise limited menu eateries, including gourmet coffee houses and bagel shops.” </li></ul></ul><ul><ul><li>“ Leisure” services </li></ul></ul><ul><ul><ul><li>often a useful measure of consumer confidence due to the impulsive, indulgent purchasing. </li></ul></ul></ul><ul><ul><li>Highly cutthroat market </li></ul></ul><ul><ul><ul><li>Pursuit of worldwide expansion for narrow profit points. </li></ul></ul></ul>

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Industry analysis <ul><li>Strategically position themselves in locations in order to capitalize on impulsive customers. </li></ul><ul><ul><li>high traffic areas such as malls, university campuses, stadiums, big-box retail units, and street corners. </li></ul></ul><ul><li>New challenges from rising health and obesity concerns </li></ul><ul><ul><li>Seen in the past by its sister sector fast food and quick services. </li></ul></ul><ul><ul><li>Rising demand for low-carb dieting </li></ul></ul><ul><ul><li>Participants in this industry hope diet are temporary trends and seek customer loyalty as their primary base. </li></ul></ul>

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Industry analysis <ul><li>Generally, special eateries include: </li></ul><ul><ul><li>Coffee shops </li></ul></ul><ul><ul><ul><li>Starbucks </li></ul></ul></ul><ul><ul><ul><li>Tully's </li></ul></ul></ul><ul><ul><ul><li>Peet's </li></ul></ul></ul><ul><ul><ul><li>Bad Ass Coffee </li></ul></ul></ul><ul><ul><li>Doughnut stores (Dunkin' Brands' Dunkin Donuts, Krispy Kreme, and Tim Hortons </li></ul></ul><ul><ul><li>Smoothie stores (Jamba Juice, Smoothie King), ice cream shops (Dairy Queen, Cold Stone Creamery) </li></ul></ul><ul><ul><li>Bagel stores (New World Restaurant Group's Einstein Bros., Bruegger's) </li></ul></ul><ul><ul><li>Bakery stores (Auntie Anne's, Mrs. Fields', and Cinnabon.) </li></ul></ul>Snack and Nonalcoholic Beverage Bars 722213 Prerecorded Tape, Compact Disc, and Record Stores 451220 Household Appliance Stores 443111 Other Home Furnishings Stores 44229 Coffee and Tea Manufacturing 311920 The North American Industry Classification System (NAICS) Codes Eating places 5812 Record & prerecorded tape stores 5735 Household appliance stores 5722 Misc. homefurnishings stores 5719 Roasted coffee 2095 The US Standard Industrial Classification (SIC) Codes

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Firm Analysis: Overview <ul><li>Founded in 1985 in Seattle, Washington. </li></ul><ul><li>13,618 Retail Stores </li></ul><ul><li>Operates in US, Canada, UK, Ireland, China, Germany, Australia, and others. </li></ul><ul><li>One of the Biggest Growth Companies of the 90’s. </li></ul><ul><li>Variety of beverages and baked goods. </li></ul><ul><li>Also sells pre-made drinks. </li></ul>

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Firm Analysis <ul><li>Exceptionally strong and enduring growth & performance </li></ul><ul><ul><li>Opened 2,199 new stores globally (ahead of original target of 1800) at an average pace of 6 new stores per day </li></ul></ul><ul><ul><li>Bringing total to 12,440 stores in 37 countries </li></ul></ul><ul><ul><li>Revenues increased 22% to $7.8 billion </li></ul></ul><ul><ul><li>Net Earnings of %564 million or $0.71 earnings per share </li></ul></ul><ul><ul><li>15 consecutive years of 5% or greater comparable store sales growth </li></ul></ul>

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Management <ul><li>Howard Schultz </li></ul><ul><li>Chairman of the Board </li></ul><ul><li>Founder </li></ul>James Donald President Chief Executive Officer Michael Casey Chief Financial Officer Executive Vice President Chief Administrative Officer

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Ownership <ul><li>635 institutions are currently holding shares of Starbucks </li></ul><ul><ul><li>The top institutional holders are Sands Capital Management, Inc., Fidelity Management & Research Corporation, and Capital Research and Management Company, which hold 44,517,978, 37,543,158, and 32,088,400 shares, respectively </li></ul></ul><ul><li>Chairman Howard Schultz remains on top direct holder with 17,020,396 shares. </li></ul>

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Compensation Policy <ul><li>The Board of Directors believes each non-employee director owns shares of Starbucks </li></ul><ul><li>Each current non-employee director is required to have invested at least $200,000 to purchase shares of the Starbuck’s common stock and must continue to hold this investment as long as such director serves on the Board. </li></ul><ul><li>The Board will review the compensation of the non-employee directors and committee members in relation to other comparable companies nationwide. </li></ul>

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Financial Analysis <ul><li>“ If you had put in $1000 into SBUX when company went public in 1992, you’d have been $52,718.10 to the good at year-end 2006, v.s. $3155.30 for S&P 500. </li></ul>

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100% 0% 2.93 14.80% 5.83% 6.15% Peet's Coffee and Tea Inc. 100% 0% 1.56 n/a -2.67% -9.78% Caribou Coffee Company 100% 0% 4.46 19.12% 12.62% 16.47% Panera Bread 87% 13% 9.56 19.15% 14.17% 26.21% Starbucks Equity Debt Price/Book Growth ROA ROE

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Financial Comparison to Industry DIRECT COMPETITOR COMPARISON 2.15 4.13 N/A N/A 2.82 P/S (ttm): 1.53 1.75 N/A N/A 1.53 PEG (5 yr expected): 27.30 26.01 N/A N/A 42.05 P/E (ttm): 1.25 1.248 N/A N/A 0.753 EPS (ttm): 231.41M 231.41M N/A N/A 612.27M Net Income (ttm): 12.78% 20.70% N/A N/A 10.24% Oper Margins (ttm): 404.44M 404.44M N/A N/A 1.36B EBITDA (ttm): 35.30% 27.64% N/A N/A 58.76% Gross Margin (ttm): 1.48B 1.48B N/A 517.00M 1 8.21B Revenue (ttm): 19.30% 15.50% N/A N/A 21.80% Qtrly Rev Growth (yoy): 1.79K 500 N/A 953 1 145,800 Employ­ees: 6.18B 6.18B N/A N/A 23.78B Market Cap: INDUSTRY THI NSRGF.PK Pvt1 SBUX

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Fair Comparison <ul><li>Starbucks </li></ul><ul><li>EPS: 0.71 </li></ul><ul><li>EBITDA: 1.36 Billion </li></ul><ul><li>NI: 612 Million </li></ul><ul><li>Share Price: -15% </li></ul><ul><li>Industry </li></ul><ul><li>EPS: 1.19 </li></ul><ul><li>EBITDA: 375 Million </li></ul><ul><li>NI: 220 Million </li></ul><ul><li>Share Price S&P 500: 10% </li></ul>

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Potential Consequences of Future Economic Conditions <ul><li>Negotiates independently of commodities market </li></ul><ul><li>Enters into long-term contracts with farmers </li></ul><ul><ul><li>“For years it has paid fair-market prices to 3 rd world coffee farmers and helped develop ecologically sound growing practices” [Forbes] </li></ul></ul><ul><li>Builds direct relationships with farmers </li></ul>

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SWOT Analysis <ul><li>Strengths </li></ul><ul><ul><li>Reputation for having the finest products and services in the world </li></ul></ul><ul><ul><li>Has expanded into 40 countries and has over 9000 cafes worldwide </li></ul></ul><ul><ul><li>Fortune’s Top 100 Companies To Work For in 2005 </li></ul></ul><ul><ul><li>Forbe’s Most Admired Companies 2007 (#2) </li></ul></ul><ul><ul><li>An organization based on quality products, with strong ethical values </li></ul></ul><ul><li>Weaknesses </li></ul><ul><ul><li>Some analysts predict that their creativity and innovation may weaken in the future </li></ul></ul><ul><ul><li>Needs to increase the company’s globalization in order to fully exploit untapped markets </li></ul></ul><ul><ul><li>May have tough time diversifying into other sectors </li></ul></ul>

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SWOT cntd. <ul><li>Opportunities </li></ul><ul><ul><li>Product Line Extensions </li></ul></ul><ul><ul><li>CD burning service with Hewlett Packard and Fair Trade products </li></ul></ul><ul><ul><li>International expansion </li></ul></ul><ul><ul><ul><li>Pacific Rim nations and India. </li></ul></ul></ul><ul><ul><li>Co-branding and brand franchising opportunities with other food and drink manufacturers </li></ul></ul><ul><ul><ul><li>PEPSI CO </li></ul></ul></ul><ul><ul><li>Product Placement </li></ul></ul>

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SWOT <ul><li>Threats </li></ul><ul><ul><li>Substitutes for coffee </li></ul></ul><ul><ul><li>Cannibalization </li></ul></ul><ul><ul><li>Rising cost of coffee and dairy products </li></ul></ul><ul><ul><li>“ Watering-down of the Starbucks experience” and “commoditization of our brand” </li></ul></ul><ul><ul><ul><li>Internal memo that surfaced in February warning executives </li></ul></ul></ul>

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Intrinsic Value <ul><li>Discounted Cash Flow Analysis </li></ul><ul><li>EBIT Growth </li></ul><ul><ul><li>Years 1-5: Upper end of analysts consensus, 24% </li></ul></ul><ul><ul><li>Years 6-10: Reduced domestic growth, continuing international growth, 20% </li></ul></ul><ul><ul><li>Years 11-Infinity: Assumed rate of inflation, 3% </li></ul></ul>

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Intrinsic Value <ul><li>Steady State NOWC and NFA through infinity. </li></ul><ul><li>Beta Estimate </li></ul><ul><ul><li>Scottrade, Thomson One, Yahoo Finance, S&P. </li></ul></ul><ul><ul><li>Used 4 betas to compute 4 WACCS and 4 intrinsic values. </li></ul></ul>

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Intrinsic Value <ul><li>Other Assumptions </li></ul><ul><ul><li>Market Risk Premium: 5% </li></ul></ul><ul><ul><li>Long-term Treasury Yield: 4.82% </li></ul></ul><ul><ul><li>Tax Rate: 37% </li></ul></ul><ul><ul><li>Equity Weight: 87% </li></ul></ul><ul><ul><li>Debt Weight: 13% </li></ul></ul>

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Overall Summary <ul><li>The resulting intrinsic value per share ranged between $37.13 to $48.10, with an average of $40.99 </li></ul><ul><li>Current price (as of 4/22/07) of $31.66. </li></ul><ul><li>As a result, we believe the stock price is slightly under priced and can expect adjustments. </li></ul><ul><li>This price will increase directly to investor expectations and the continued pursuit of international growth strategy while maintaining “the Starbucks experience.” </li></ul>

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Questions?