Starbucks

November 1, 2006

Starbucks Corporation (SBUX)

Analysis By:

Sarah Lamb

sarah.a.lamb@ttu.edu

Jeff Leaverton

j.leaverton@ttu.edu

Rachel Morris

r.morris@ttu.edu

Lauren Wein

lauren.r.wein@ttu.edu

Scott Weiser

scott.t.weiser@ttu.edu

Starbucks Valuation

TABLE OF CONTENTS

Executive Summary………………………………………….3

Company Overview.…………………….……………………6

Industry Structure and Profitability………….………….6

Value Chain Analysis……………….…………….….……11

Firm Competitive Advantage Analysis…………….…..11

Accounting Analysis……………………………………….12

Key Accounting Policies………………..………..12

Degree of Accounting Flexibility…………..…..14

Accounting Strategy……………………..………15

Quality of Disclosure……………………..……..16

Potential “Red Flags”………………………..…..19

Undo Accounting Distortions……………..…..19

Financial Ratio Analysis…………..……………………20

Capitalized Lease Ratios……………………….22

Operating Lease Ratios………………………...23

Trend Analysis…………………………………………..23

Liquidity Ratios………………………………….24

Efficiency Ratios………………………………...24

Profitability Ratios………………………………25

Capital Structure Ratios………………………25

Ratio Changes After Capitalization…………25

Financial Statement Forecasts……………………….27

1

Firm Valuation…………………………………………..29

Cost Of Debt……………………………………29

Cost Of Equity…………………………………29

WACC……………………………………………30

Credit Risks……………………………………30

Intrinsic Valuations……………….…………31

Residual Income Valuation………………..31

AEG Valuation………………………….…….33

Long Run ROE Valuation…………….……34

Free Cash Flow Valuation…………….…...34

References……………………………………………..36

Appendices.…………………………………………37

2

Executive Summary

Starbucks Corporation

Investment Recommendation: Over-Valued, Sell

11/01/06

EPS Forecast

52 week range

Revenue (2005)

Market Capitalization

38.26

28.7240.01

7.44B

26.61B

Shares Outstanding

756.07M

Valuation Estimates

Dividend Yield

3-month Avg Daily Trading

Volume

Percent Institutional Ownership

N/A

Actual Current Price

35.29

Book Value Per Share...