Weekly Valuation – Valutico | 9 January 2023
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About Starbucks Corporation
Starbucks is an international coffee chain, operating more than 35,000 coffee shops worldwide, including company-owned shops and franchised locations, mainly in urban areas, shopping malls and airports. Starbucks also sells its products through other channels such as grocery shops, wholesalers and online. In April 2022, interim CEO Howard Schultz will step down to make space for Laxman Narasimhan, who will lead the plan to reinvent the company and push for more aggressive growth in the coming years.
Recent Financial Performance
Starbucks recently published its annual report for the 2022 financial year that ended in early October. Although revenue increased by $3.2 billion to a total of $32.3 billion in 2022, the company’s net profit decreased by about 22% to $3.3 billion. Net profit in 2022 is lower than in 2021, mainly due to an increase in operating expenses and the fact that the company received $860 million for divestments in 2021.
Starbucks’ Reinvention Plan
During the 2022 annual report conference, Starbucks’ interim CEO Schultz announced the reinvention plan for the next three years. The company increased its sales growth target to 10%-12% compared to the previous target of 8%-10%. The global portfolio of coffee shops should also increase by roughly 10,000 stores to arrive at 45,000 in 2025. In 2030 Starbucks is expected to have 55,000 stores around the world. Earnings per share should also increase by 15%-20% each year compared to the previous target of 10%-12%.
Changes in Rewards Program
Another change which will take place this year is the rewards program where Starbucks customers earn one star, or two stars if they have a Starbucks Card, per dollar spent on a company product. However, the coffee chain has drastically increased the number of stars required to receive a free product, even doubling it in some tiers. Customers have expressed their anger about this change on social media which could potentially have a negative effect on company sales.
Share Price Performance
Starbucks’ share had a successful time over the last five years as the share price increased by 67% from $60 per share in early 2018 to its current level of $103 per share. The recent increase is attributable to the above-mentioned reinvention plan and the reopening of China.
Starbucks’ five-year share price chart is shown below:
Source: Yahoo Finance, https://yhoo.it/3Cp8wBA.
We analyzed Starbucks Corporation by using the Discounted Cash Flow method, specifically our DCF WACC approach, as well as a Trading Comparables analysis. The Discounted Cash Flow analysis produced a value of $68.6 billion using a WACC of 8%.
The Trading Comparables analysis resulted in a valuation range of $83 billion to $118 billion, by applying the observed trading multiples EV/EBITDA, EV/EBIT and P/E. For our Trading Comparables we selected similar peers such as McDonald’s, Yum! Brands and Restaurant Brands International.
Combining our DCF WACC and Trading Comparables analyses resulted in a value range of $68.6 billion to $118 billion. In comparison to Starbucks’ market capitalization of $120 billion we suggest that the company is slightly overvalued.
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This article is for informational purposes only and does not constitute investment advice. None of the information contained herein constitutes a solicitation, offer or recommendation to sell or buy any financial instrument.