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1 February 20, 2015 Starbucks Corp (SBUX-NASDAQ) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 03/24/2010 Current Price (02/19/15) $93.17 Target Price $ Week High $ Week Low $68.73 One-Year Return (%) Beta 0.78 Average Daily Volume (sh) 5,588,253 Shares Outstanding (mil) 750 Market Capitalization ($mil) $69,878 Short Interest Ratio (days) 2.32 Institutional Ownership (%) 71 Insider Ownership (%) 4 SUMMARY Starbucks adjusted earnings of $0.80 per share in the first quarter of 2015 were in line with the Zacks Consensus Estimate. However, earnings grew 23% year over year driven by solid top-line improvement and margin expansion. Strong traffic trends in the American stores and improved comps in the China Asia-Pacific segment resulted in 13% increase in sales. A strong holiday performance improved traffic trends in the American stores. We believe that Starbucks enjoys healthy fundamentals strong global retail footprint, successful food/beverage innovations, best-in-class loyalty program and digital offerings, rapid growth in international markets and ongoing impressive CPG growth. Moreover, strong food sales, new handcrafted beverages, lunch/evening program, Teavana tea, K-Cup innovations and digital efforts can fuel stronger traffic in fiscal However, a challenging retail environment keeps us on the sidelines. Risk Level * Below Average Type of Stock Large-Growth Industry Retail-Restrnts Zacks Industry Rank * 43 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Dec) (Mar) (Jun) (Sep) (Sep) Annual Cash Dividend $1.28 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 11.7 Earnings Per Share (%) 20.3 Dividend (%) 24.9 P/E using TTM EPS 33.6 P/E using 2015 Estimate 29.8 P/E using 2016 Estimate 25.3 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page ,800 A 3,556 A 3,742 A 3,795 A 14,892 A ,240 A 3,874 A 4,154 A 4,181 A 16,448 A ,803 A 4,488 E 4,815 E 4,958 E 19,064 E ,438 E 21,409 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Dec) (Mar) (Jun) (Sep) (Sep) 2013 $0.57 A $0.48 A $0.55 A $0.60 A $2.20 A 2014 $0.71 A $0.56 A $0.67 A $0.74 A $2.66 A 2015 $0.80 A $0.65 E $0.80 E $0.88 E $3.13 E 2016 $0.96 E $3.69 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved North Canal Street, Chicago IL 60606

2 OVERVIEW Founded in 1985 and based in Seattle, WA, Starbucks Corporation (SBUX) is the leading roaster and retailer of specialty coffee in the world. In addition to fresh, rich-brewed coffees, Starbucks offerings include many complementary food items and a selection of premium teas and other beverages, sold mainly through the company s retail stores. Starbucks has more than 21,000 stores across 66 countries. The company s popular brands include Starbucks coffee, Teavana tea, Tazo Tea, Seattle's Best Coffee, La Boulange bakery products and Evolution Fresh juices. Other than the company s own retail stores (accounting for 79% of fiscal 2014 revenues), it generates revenues through licensed stores (10%), consumer packaged goods (8%) and foodservice operations (3%). The company receives royalties and license fees from the U.S. and international licensed stores. Under its consumer packaged goods operations, Starbucks sells packed coffee and tea products as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery, warehouse clubs and specialty retail stores. It also includes revenues from licensing deals with many partners to produce and sell its Starbucks and Seattle's Best Coffee branded products. Under its foodservice operations, Starbucks supplies some of its products to restaurants, office coffee distributors, hotels, airlines and other retailers. Starbucks operates through the following segments: Americas (inclusive of the U.S., Canada and Latin America); Europe, Middle East and Africa (EMEA); China-Asia-Pacific (CAP); and Channel Development (CD); and All-Other. The CD segment is not a geographic region but an entirely different channel (referred to as CPG channel henceforth). It includes roasted whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages (like Frappuccino and Starbucks Refreshers) and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers, and foodservice to name a few. The All-Other segment comprises emerging brands including Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures. The company s long-term targets include revenue growth of 10% or greater, global comparable store sales in the mid single-digits, earnings per share growth of 15% to 20% and 25% or higher return on invested capital. REASONS TO BUY Strong Brand Position: Starbucks is one of the most recognized coffee brands in the world. From espresso to specialty roast and ground coffee to premium single-serve market, Starbucks commands authority and a leading position in all coffee segments. It is the number one premium packaged coffee brand in America. Further, management focuses on increasing its global market share by judiciously opening stores in new and existing markets, remodeling existing stores, product innovation, controlling costs and brand building. Best-in-Class Loyalty Program and Digital Offerings: Starbucks holds a leadership position in digital, card, loyalty and mobile capabilities. The accelerating global adoption of smartphones and mobile technologies is gradually transforming and evolving the retail landscape in areas of payment, loyalty and consumer experiences. Equity Research SBUX Page 2

3 Retail companies are witnessing a shift in consumer shopping behavior from bricks-and-mortar stores to online shopping. As such, CEO Schultz intends to focus more on leveraging the mobile and digital assets and loyalty and e-commerce platforms to create more revenue streams. Starbucks loyalty cards are gaining popularity and at present, nearly one-third of all the U.S. and Canada transactions are made through Starbucks cards. At the end of Dec 2014, the company had 9 million active members in the U.S. under My Starbucks Rewards (MSR) program, up 23% from the year-ago period. Moreover, Starbucks mobile app is undoubtedly one of the most widely used mobile payment app in the U.S. Nearly 16% of all U.S. transactions take place through mobile, growing 50% annually. In Dec 2014, Starbucks launched its Mobile Order & Pay initiative in 150 stores Portland, OR and plans to launch it nationwide by 2015-end. This initiative will allow customers to order before arriving at a Starbucks cafe. The company also expects to introduce food and beverage delivery through either a third party or its own employees in select urban markets in the second half of These new mobile initiatives are expected to quicken service, increase convenience and enhance customer loyalty thereby driving mobile payment transactions and spurring traffic. Meanwhile, following the success of its mobile payment services, Starbucks is receiving partnership offers from several mobile payment companies. The company is also witnessing an increased usage of MSR in countries outside the U.S. like China, Korea and Canada. With the Jan 2014 launch of Starbucks gift card in China, these are now available in 29 countries. MSR transactions in China account for over 40% of the total tender. Further, the company is trying to broaden the reach of the Starbucks loyalty and mobile platform to its CPG business and emerging brands. Starbucks customers can now earn reward points under the MSR loyalty program on purchase of packaged coffee at its grocery channels which is expected to further boost sales. Further, customers can now use Starbucks cards as well as Starbucks mobile application at certain Teavana, Evolution Fresh and La Boulange locations. Focus on Innovation: Starbucks is strengthening its product portfolio with significant innovation around beverages, refreshment, health and wellness, tea and core food offerings. Beverage innovations have been a significant contributor to comps growth for Starbucks over the years. Its energy drink, Starbucks Refreshers, made from real fruit juice and green coffee extract has been a hit in the afternoon daypart. Seasonal offerings like pumpkin spice latte have been in the market for 10 years now and are quite popular. The company is also looking to put premium arabica coffees, Starbucks Reserve and Clover, a high-quality single serve brew coffee in more stores. Other successful beverage innovations include, Fizzio sodas, Teavana Oprah Chai and Green Tea Red Bean Frappuccino in Asia Pacific. Apart from the numerous beverage innovations, Starbucks has also been making an effort to offer more nutritional and healthy products to its customers. The coffee giant has been able to fully capitalize on the Evolution Fresh Juice brand since its acquisition in In addition to being available in approximately 8000 U.S. Starbucks stores, Evolution Fresh juices are available at supermarket chain, Whole Foods locations nationwide. Further, Starbucks has joined forces with dairy products maker, Danone, to create Evolution Fresh-branded Parfait Greek yogurt products to be rolled out at Starbucks stores in calendar Equity Research SBUX Page 3

4 Starbucks is fast expanding its food offerings in the U.S. after the launch of its premium bakery goods (following La Boulange acquisition in 2012), breakfast and lunch sandwiches and salads to complement its drinks. Food contributes around 20% of the company s U.S. revenues. Starbucks plans to double its U.S. food sales to more than $4 billion over the next five years. Moreover, the company plans to expand its lunch menu and offer locally relevant snacks around the world. Starbucks much talked about evening program food, wine and beer offerings available at some stores will be expanded to more stores in fiscal 2015, with plans of rolling it out in 20 25% of Starbucks stores in the U.S. by fiscal The evening program is expected to add $1 billion in revenues by the end of fiscal With the acquisition of specialty tea retailer Teavana in Dec 2012, the company aims to capture further share of the $109 billion global tea category. Starbucks has opened 60 Teavana tea bars offering an assortment of handcrafted tea beverages, premium loose leaf teas, tea-inspired food offerings and tea merchandise. Starbucks is seeing increased sales of Teavana handcrafted beverages like Teavana Oprah Chai (in collaboration with global media leader and philanthropist Oprah Winfrey) and Teavana Shaken Iced Tea and Teavana premium loose-leaf teas at its Starbucks stores in North America. While Teavana tea represents a small portion of sales presently, management remains focused on growing the brand to $2 billion over the next five years. We believe Starbucks new food and beverage offerings will be a major driver of comps in the next few years. Brisk Growth of the CPG Business: The CPG business is growing rapidly and is now the secondlargest unit at Starbucks that has grown three times faster than the company average. In North America, the company has 100,000 points of distribution in the CPG channels. It is a largely diverse (in terms of revenue mix), high-margin, high-return-on-capital business. Contributing heavily to the CPG success is the premium single-serve platform where K-Cup sales have grown massively. The CPG business revenues increased 50% in fiscal 2012, around 10% in fiscal 2013 and 11% in Also, Evolution Fresh and Teavana present significant long-term opportunities within the CPG channel. Over the next five years, Starbucks expects to grow its Channel Development segment revenues by 60% and nearly double its operating income. Strong American Business: The company s U.S. operations, its largest business, accounts for almost two-thirds of the consolidated total net revenue of Starbucks. The Americas business has been doing well for the last couple of years due to beverage innovations, expanded food offerings, digital initiatives and operational improvements. Moreover, food is being considered as an important longterm growth driver for the U.S. comps. The launch of the La Boulange products in the U.S. companyoperated stores is a material elevation of Starbucks food platform. In addition, the company is expanding its other food offerings, including new breakfast pairings and lunch and evening programs. Drive-through stores which generate incremental revenues and profits compared to traditional stores are also an important sales driver in the domestic market. Following the success of drive-thru stores, Starbucks plans to open small footprint express stores next year in New York City to cater to the onthe-go coffee drinkers. Equity Research SBUX Page 4

5 Expanding beyond the U.S.: In the past two years, management has successfully turned around its EMEA business by improving customer experience, up-leveling product offerings and growing margins through process and supply chain efficiencies. Moreover, the Starbucks brand is gaining popularity with consumers across Asia as the company is increasingly investing in the Asian markets. The relatively low per-capita consumption as well as a burgeoning middle class with rising income levels increase the demand for convenience food and beverages and promise significant growth potential. Management believes that China and the Asia-Pacific region will drive much more meaningful business growth over the next five years supported by rapid unit growth, growing brand awareness, and increased usage of the mobile/loyalty platforms. The region has delivered 17 consecutive quarters of more than 20% revenue growth. Starbucks plans to double CAP store count to roughly 10,000 and triple CAP revenues to over $3 billion by Starbucks' business in China is rapidly growing due to innovative store designs, local product innovations and the success of MSR program. The company also expects to introduce its CPG business in China in the long term. Starbucks plans to double its store count in China to over 3,000 by 2019 from the present Beyond China, the company is accelerating growth in countries like Japan, Korea, Thailand and Indonesia. In Japan, management expects to take full ownership of its Japanese joint venture (JV) Starbucks Coffee Japan, Ltd. to accelerate store growth and innovation in this market. Moreover, Starbucks has 63 stores in the lucrative Indian market and 8 stores in Vietnam. Further, it plans to open 100 stores each in Indonesia and Philippines over the next 3 4 years. Outside Asia-Pacific, the company operates more than 500 stores in Latin American countries like Chile, Mexico, Argentina and Colombia. REASONS TO SELL Challenging Macroeconomic Environment: As a retail restaurant, Starbucks is dependent on consumer discretionary spending environment. Despite moderate improvement in economic growth, consumers are increasing their spending only modestly, as a surge in job growth this year is yet to translate into significantly higher wages. High interest rates, higher healthcare costs and stilltightened credit availability continue to hurt consumer discretionary spending in the U.S. In Europe, though signs of improvement have been seen, markets are yet to reach pre-crisis levels. Rising Commodity Cost Pressures: The overall cost environment for food commodities was under pressure in 2014 due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors. Commodity costs are not expected to be a tailwind in fiscal 2015 like the previous two years. With coffee prices rising in 2014, management expects commodity cost to have a roughly neutral year-over-year impact on fiscal 2015 earnings. Starbucks Products Less Popular Outside the U.S.: Consumer tastes vary by regions and international consumers may not like Starbucks products to the same extent as their U.S. counterparts. Though the company is making efforts to expand beyond the U.S., if it does not properly preserve, grow and leverage the value of its brands, its international expansion plans may fall apart. Equity Research SBUX Page 5

6 RECENT NEWS Starbucks Launches Premium Coffee Delivery Service Feb 17, 2015 Starbucks announced the launch of a subscription service under which freshly roasted premium coffees will be delivered to customers homes straight from its newly opened Seattle roastery. Through this subscription, upscale coffee lovers will get Starbucks select small-batch premium Reserve coffees available only at the Seattle Reserve Roastery and Tasting Room or through monthly subscriptions. The company will deliver the coffee beans within three to five days of being roasted. While a one-month subscription costs $24, a 12-month subscription is priced at $288. Starbucks First Quarter Earnings In Line; Holiday Offerings Drive Sales January 22, 2015 Starbucks announced solid first-quarter fiscal 2015 results more than 40 years. its most successful holiday performance in Moreover, the company named board member, Kevin Johnson, as the president and chief operating officer (COO) and raised the lower end of fiscal 2015 earnings forecast. Earnings In Line Adjusted earnings of $0.80 per share were in line with the Zacks Consensus Estimate as well as within management s expected range of $0.79 $0.81. Earnings grew 16% year over year driven by solid top-line growth and margin expansion. Adjusted earnings exclude special items, mainly gain related to the acquisition of its Japanese JV. In Sep 2014, the coffee giant announced plans to take full ownership of its Japanese JV Starbucks Coffee Japan, Ltd. for around $914 million. The company has already acquired 94% equity stake in Starbucks Japan. The transaction is expected to be completed before the end of first half of calendar Revenues and Comps Improve Total first-quarter sales of $4.80 billion increased 13% year over year and marginally beat the Zacks Consensus Estimate of $4.79 billion. Same-store sales (comps) grew 5%, same as the previous quarter. The comps rise included 2% increase in global traffic and 3% average ticket growth. Incremental revenues from Starbucks Japan, strong traffic trends in the American stores and improved comps in the China Asia-Pacific (CAP) segment primarily drove sales. We believe that Starbucks digital efforts, coupled with strong food sales, new handcrafted beverages, revamped lunch and evening program, Teavana tea and K-Cup innovations should spur traffic in fiscal Equity Research SBUX Page 6

7 Margins Remain Strong Adjusted operating margin increased 80 basis points (bps) to 19.5% driven by strong sales leverage. Margins expanded in all the operating segments, except the CAP region. However, operating margins declined 50 bps sequentially due to the dilution resulting from ownership change in Starbucks Japan. Segment Details Americas: Net revenue in this flagship segment rose 10% from the prior-year quarter to $3.37 billion, attributable to 5% growth in comps driven by a strong holiday season. A strong holiday food and beverage line-up, solid performance of holiday gifting merchandise and expanded collection of Starbucks gift cards and a decent consumer response to the "Starbucks for Life" promotion aided traffic trends at the American stores. Food contributed 2% to comp growth driven by strong performance of breakfast sandwiches (up 29%) and lunch offerings (up 15%). Holiday beverages recorded 9% year-over-year growth including the big hit Chestnut Praline Latte. Total tea sales in the U.S. stores increased 17% year over year gaining from Teavana s handcrafted iced teas Last year, during the holiday season, Starbucks witnessed slower-than-expected traffic at the American stores as a result of continued shift away from brick and mortar retail to online sales. As such, CEO Schultz is focusing more on leveraging the mobile and digital assets as well as loyalty and e-commerce platforms to create more revenue streams. The success of the Starbucks card program in the holiday quarter clearly shows that the company s efforts are paying off. Dollars loaded on Starbucks Cards surged 17% year over year to a record $1.6 billion. Moreover, one out of every seven American received a Starbucks gift card this season, up from one in eight in In the first quarter alone, Starbucks added almost 900,000 new MSR members. Adjusted operating margin improved 50 bps to 24.3% driven by strong sales leverage. In fiscal 2015, operating margins are expected to improve moderately over 2014 levels as favorable sales leverage will be offset by expenses related to the mobile order and pay rollout and ongoing investments in employees. Europe, Middle East and Africa (EMEA): Net revenue declined 2% year over year to $333.3 million due to currency headwinds. Excluding currency headwinds, revenues grew 3% driven by 4% increase in comps. Starbucks continues to outperform in the U.K. Adjusted operating margin increased 510 bps to 15% due to solid sales leverage and cost control. A shift to more higher-margin licensed stores also pulled up margins. The segment has turned around in the past two years driven by management s efforts to improve customer experience, up-leveling product offerings and improving margins through process and supply chain efficiencies. In fiscal 2015, operating margins are expected to be at the higher end of the 10 12% target. Equity Research SBUX Page 7

8 China-Asia-Pacific (CAP): Net revenue grew 86% to $495.8 million driven mainly by incremental $172 million in revenues from the acquisition of Starbucks Japan. Excluding Starbucks Japan, CAP revenues grew over 20% driven by better comps and store openings. Comps grew 8%, improving significantly from 5% rise in the last quarter, driven by increased traffic. China growth outpaced the region. Operating margin at the CAP segment declined 860 bps year over year to 21.8% due to dilution from ownership change in Starbucks Japan. Excluding Starbucks Japan, CAP margin increased 200 bps driven by strong sales leverage and improved operational performance. In fiscal 2015, operating margins are expected to remain in the high-teens range, including amortization expense related to the planned acquisition of Starbucks Japan. Channel Development/CPG: This segment includes whole bean and ground coffees, premium Tazo teas, a variety of ready-to-drink beverages, Starbucks VIA Ready Brew, and Starbucks and Tazo branded K-Cup packs sold through channels such as grocery, specialty retailers and foodservice among others. Net revenue grew 10% year over year to $442.6 million driven primarily by increased sales of packaged coffee and Starbucks-branded K-Cup offerings. Higher K-Cup sales were driven by core product sales as well as strong customer response to new K-Cup products, led by flavored coffees and seasonal limitedtime offerings like Fall Blend. Adjusted operating margin increased 600 bps to 35.6% driven by significant top-line growth, low coffee costs and other cost of goods sold efficiency. In fiscal 2015, operating margins in the segment are expected to improve only modestly from 2014 levels as coffee favorability wanes through the remainder of fiscal All-Other: The All-Other segment includes emerging brands including Teavana (acquired in Dec 2012), Seattle's Best Coffee, Evolution Fresh and Digital Ventures. Revenues in the segment grew 3% to $164.6 million. Other Financial Details In the quarter, the company repurchased nearly 3 million shares with 13 million shares remaining under the current authorization. Fiscal 2015 Outlook Starbucks expects revenues to grow 16 18% in fiscal 2015, including approximately 6 7% of revenue growth from the Starbucks Japan acquisition. Comps are still expected to grow in the mid single-digit range. The company expects to open 1,650 stores in the year 650 in the Americas, 150 in EMEA and 850 in CAP. The lower end of fiscal 2015 adjusted earnings per share guidance (excluding adjustments related to Starbucks Japan) was raised by a penny, encouraged by strong first-quarter performance. Adjusted earnings per share are now expected in the range of $3.09 to $3.13 versus $3.08 to $3.13, representing 16 18% growth. The company expects EPS to be near the lower end of the range in the first half and closer to the upper end in the second half. Equity Research SBUX Page 8

9 Better top-line performance amid a range of sales drivers (mobile order/pay, food & beverage innovation, international growth) and various cost saving initiatives are expected to result in better earnings growth in the second half. Starbucks is on track to generate $200 million of supply chain savings in On a positive note, management talked about improved visibility on the impact of commodity costs. Starbucks stated that coffee costs have gone down over the past six weeks and it does not see any indication of a slowdown in coffee supply. As such, management expects commodity costs to have a roughly neutral year-over-year impact on fiscal 2015 earnings as around 94% of its coffee needs for the year are locked at favorable prices. Adjusted operating margin is expected to remain flat or increase slightly year over year in fiscal Currency headwinds are expected to hurt revenue growth and operating income growth by about 1% each. In fiscal 2015, management expects to incur capital expenditures of approximately $1.4 billion driven primarily by store investments. The effective tax rate for fiscal 2015 is expected to be approximately 31%, including a net tax benefit of approximately 4% from the Starbucks Japan acquisition. Second-Quarter Outlook Soft Adjusted earnings per share are expected in the range of $0.64 $0.65 in the second quarter of fiscal The second-quarter earnings expectations fell short of the Zacks Consensus Estimate of $0.68 due to increased U.S. store employee related investments, in our view. As part of its employee investments, management plans to increase barista/manager pay, enhance recognition programs, and introduce a new food benefit among others to improve employment environment. New Chief Operating Officer Starbucks named board member and former CEO of Juniper Networks, Kevin Johnson as the president and COO. The news comes after Starbucks announced earlier this month, that current COO, Troy Alstead is going on an indefinite unpaid leave from March. Starbucks COO Alstead to Go on Extended Leave January 8, 2015 Starbucks announced that COO Troy Alstead, who has been with the company for 23 years, will go on an indefinite unpaid leave from March to spend time with his family. Starbucks did not mention when Alstead who will serve as the COO till Mar 1, 2015 will rejoin. Alstead has served as Starbucks chief financial officer and led operations and development of Starbucks international business and its Europe, Middle East and Africa business unit. Equity Research SBUX Page 9

10 Starbucks Brews a Five-Year Plan December 4, 2014 At its biennial Investor Day held in Seattle on Dec 4, Starbucks detailed an ambitious five-year plan to accelerate growth. Management discussed in detail the innovative mobile commerce initiatives, expansion plans in China, plans to expand the evening program and double the U.S. food sales and opening of its first "roasterycafé" in Seattle. This range of new drivers is expected to push up the coffee giant s revenues to $30 billion in fiscal 2019, up from $16 billion in fiscal Mobile Order and Pay Platform Starbucks launched its Mobile Order & Pay initiative in Portland, OR area on Dec 3 and plans to launch it nationwide by 2015-end. This initiative will allow customers to order before arriving at a Starbucks cafe. Mobile Order & Pay will be available for customers using the Starbucks app for iphone in markets where is has been launched. Starbucks also expects to introduce food and beverage delivery through users mobile devices in select urban markets in the second half of Unveils Starbucks Reserve Roastery Starbucks opened its first ever Starbucks Reserve Roastery and Tasting Room in Pike Street, Seattle in Dec The unique concept will offer roasting, education as well as retailing. With the roastery, Starbucks expects to double its small-batch roasting capacity of these unique super-premium arabica Reserve brand coffees and expand their availability to 1,500 stores globally. Moreover, the company plans to open 100 upscale Reserve Roastery stores over the next five years. It already operates such stores in Japan and Latin America. Focus on Food Starbucks is fast expanding its food offerings in the U.S. with the launch of the premium bakery goods, breakfast and lunch sandwiches and salads to complement its drinks. Starbucks plans to double its U.S. food sales to more than $4 billion over the next five years. Moreover, the company plans to expand its lunch menu and offer locally relevant snacks around the world. Starbucks much talked about evening program food, wine and beer offerings available at some stores will be expanded to more stores in fiscal 2015, with plans of rolling it out in 20 25% of Starbucks stores in the U.S. by fiscal The evening program is expected to add $1 billion in revenues by the end of fiscal Starbucks also plans to open small footprint express stores next year in New York City to cater to the onthe-go coffee drinkers. The express format follows the success of Starbucks highly popular drive-through concept. We believe that the digital/mobile efforts, coupled with increased food sales, new store formats, revamped lunch and evening platform and Teavana tea should spur traffic growth in fiscal Equity Research SBUX Page 10

11 Expansion Plans in China, India, Japan and Brazil Management believes that the CAP region will drive more meaningful business over the next five years supported by rapid unit growth, growing brand awareness and increased usage of the mobile/loyalty platforms. Starbucks' business in China is rapidly growing due to innovative store designs, local product innovations and the success of My Starbucks Rewards program. At the investor conference, Starbucks announced plans to double its store count in China to over 3,000 by In Japan, its second largest market outside the U.S., management expects to complete the purchase of full ownership of its Japanese joint venture Starbucks Coffee Japan, Ltd. by the second quarter of This, coupled with expansion in China, will further accelerate Starbucks growth in the CAP region. Equity Research SBUX Page 11

12 VALUATION Starbucks shares carry an attractive value. Starbucks current trailing 12-month earnings multiple is 33.6x, representing a discount of almost 5% to the industry average of 35.3x. Based on 2015 earnings estimate of $3.13, the stock is trading at 29.8x, a discount of 33.8% to the industry average of 45.0x. Over the last five years, Starbucks shares have traded in the range of 20.0x to 37.0x trailing 12-month earnings. At the end of the first quarter of fiscal 2015, the P/B multiple of the stock was approximately 11.5x, a 55% discount to the industry average of 25.6x. On a ROE basis, the stock carries a trailing 12-month ROE of 39.3%, which is better than a return of 20.5% from the industry. We have a long-term Neutral recommendation on the stock. Our target price of $98.00 is based on approximately 31.3x fiscal 2015 earnings estimate. On a P/B basis, the price target is based on a P/B multiple of approximately 12.1x. Key Indicators P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF (TTM) P/E (TTM) P/E 5-Yr High (TTM) P/E 5-Yr Low (TTM) Starbucks Corp. (SBUX) Industry Average S&P McDonalds Corp. (MCD) YUM! Brands Inc. (YUM) Darden Restaurant Inc. (DRI) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE (TTM) D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA (TTM) Starbucks Corp. (SBUX) Industry Average S&P Equity Research SBUX Page 12

13 Earnings Surprise and Estimate Revision History Equity Research SBUX Page 13

14 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SBUX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 7.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Last Updated by Copy Editor Content Editor Lead Analyst QCA Reason for Update Kinjel Shah Kinjel Shah Kamalika Pramanik Kinjel Shah Kinjel Shah Q4 Earnings Update Equity Research SBUX Page 14