Starbucks (NASDAQ:SBUX) is the world’s leading roaster and retailer of specialty coffee. Through its global network of owned and franchised coffee retail outlets, Starbucks offers a wide range of products from coffees and teas to sandwiches and brewing equipment. It competes with McDonald’s (NYSE:MCD), Caribou Coffee (NASDAQ:CBOU) and Peet’s Coffee (NASDAQ:PEET) in the broader market for specialty coffee.
We estimate that Starbucks’ company-owned stores constitute around 44% of our estimated $30.50 value for the company’s stock while franchised stores generate an incremental 29%.Packaged Coffee, Tea & Other add a further 19%. Our price estimate stands about 15% below the market price.
Coffee Prices Remain Stubbornly High
Starbucks is feeling the pressure of increasing coffee prices, as a result of which it may have to increase prices further. The company feels that speculators have had a significant contribution to increasing coffee prices. Starbucks is expected to increase the price of its packaged coffee by around 12%, its first price increase on this product in 3 years. [1] However, coffee production is not expected to increase in the future, and as a result, a long period of high prices may become a possibility. [2]
Starbucks’ packaged coffee & tea revenues increased from $254 million in 2005 to $364 million in 2009, an average annual growth rate of 9.4%. We expect packaged coffee & tea revenues for Starbucks to increase in the coming years supported by strong consumer spending as economic conditions improve. We expect the revenues to increase at an average annual growth rate of 5.4%, reaching $554 by the end of our forecast period.
However, if Starbucks continues to increase prices over the next few years in the face of increasing coffee prices, there can be a downside to our forecast. In a highly competitive market, customers may shift to cheaper alternatives in the long run. To show sensitivity, if the revenues increase at a rate that is 250 basis points below are current estimate reaching $450 million by the end of our forecast period, it would result in a downside of 2% to our current price estimate for Starbucks’ stock price.
See our full analysis on Starbucks
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