The word ‘Starbucks’ is synonymous with coffee. The company is most famous for the wide presence of its stores globally which provide customers with an inviting atmosphere to drink and enjoy premium coffee. This strong brand is associated with consistent, high quality coffee, and this experience distinguishes it from other coffee chains and is a key reason why the chain is able to charge premium prices.
The company’s revenue stood at $12.2 billion in 2011 and $13.7 billion for 2012. The company-wide EBITDA margins have historically been in the range of 22-24%. 
Starbucks has close to 18,000 stores worldwide of which more than half are company-operated and the rest are licensed stores. However, the company has shown a greater predilection to open licensed stores lately with close to 60% of new additions being licensed stores. In 2013, Starbucks will accelerate store openings to 1,300 primarily focusing on China, Mexico, Costa Rica as well as India and the Nordic region.
1) Company-operated stores:
Starbucks incurs all costs related to the stores and profits go to the company’s books. The company-operated stores generated revenues of $9.9 billion and $10.8 billion in 2011 and 2012, respectively. Trefis adjusted margins in 2011 were close to 17%. We estimate company-operated stores account for 60% of Starbucks’ value.
Margins are expected to stay in a similar range in 2013 since the company’s same-stores sales have fared well, negating the impact of any rise in fixed costs such as labor and occupancy costs. Starbucks has outperformed other mature restaurant stocks. Same-store sales were up 7% in the U.S. in 2012 as well as 2011. On the other hand, same-store sales of McDonald’s, Chipotle Mexican Grill and Dunkin Donuts have slowed in 2012.
2) Licensed Stores:
Revenue from licensed stores exceeded $1.2 billion in 2012. Due to the franchising nature of the business, it has a high profit margin of around 75%. We expect EBITDA margins will continue to remain high as royalty rates tend to remain stable. In 2013, Starbucks plans to add 800-900 licensed stores globally.
Starbucks earns its revenues as a percentage of franchisee sales. All expenses related to the cost of food/beverages, labor, occupancy and miscellaneous are borne by the franchisees. We estimate this segment accounts for 30% of the company’s value.
3) Distribution Channel:
In addition to its stores, Starbucks has a growing packaged products business which it labels as distribution channel products. It has built a good distribution network through which it sells its packaged coffee and tea, K-cups and Evolution juices. Revenues for its consumer packaged goods exceeded $1.3 billion for 2012, up 30% over 2011.
One of the reasons why this division is witnessing strong growth is because of expanded distribution combined with the continuous addition of new products to its portfolio. For example, the company has made available its bottled juices available in supermarkets and mom & pop stores under the Evolution brand besides opening up its juice bars. Similarly, for Teavana, it plans to sell packaged tea at supermarkets besides opening tea bars under this brand.
The company is trying to diversify its offerings beyond coffee and acquired a juice company, Evolution Juice, in November 2011 for $30 million. Similarly, it acquired bakery chain La Boulange for $100 million in the first half of 2012. The bakery items will help expand the menu at its stores, and food revenues already constitute $1.5 billion in annual sales and can only grow with the help of this acquisition. It also acquired a tea company called Teavana in a deal estimated at $620 million in late 2012. These moves appear aimed at extending the Starbucks experience to other food and drink items than coffee and could help expand its addressable market.
Starbucks has also forayed into the single-cup brewer segment by introducing the Verismo, a high pressure brewer system used for making lattes and cappuccinos, in September 2012. The Verismo is seen as a potential threat to Green Mountain Coffee Roasters’ (NASDAQ:GMCR) dominant position in the single-cup brewer market owing to Starbucks’ financial muscle. Within the first quarter of its debut, the company has already sold more than 150,000 brewers.
We have a $58 price estimate for Starbucks, which is about 10% higher than the current market price.Notes: