Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Sarah Königs Published: January 30, 2023
Model Forecast Thesis: I believe that Starbucks is further going to increase it´s product range with beverages that can not be home-made or purchased elsewhere. As a consequence, brand loyalty will increase, as well as drink customization and favorable product mix (more high margin beverages) will accelerate over the next few quarters”. The target customer group for these products are Gen-Z customers that show a high demand for cold/customized drinks. In order to increase the product range of unique beverages Starbucks will further have to invest in customization equipment and come up with new beverages and corresponding equipment that will not be available elsewhere.
I believe that due to macro-economic and demographic factors (boomer generation retiring) employee recruitment and retention is going to become increasingly difficult for low-paid jobs in North America. Since a high turnover comes with high costs (especially training, given the complexity of its products) Starbucks will have to increasingly invest in wages and benefits for its staff in order to keep turnover at an acceptable level.
Market Multiple Valuation Description: I have selected a PE multiple of 32x, which is higher than the historic average of 28x. In my view the long term earnings profile of the company will be positively impacted by the growth plan and future investments in equipment. I do believe that the economy will slowly recover from the events of the past years (Covid, Ukraine war and inflation) and I am optimistic about the valuation of the company.
Equity Risk Premium Model Description: I am carefully optimistic about the development of the four indicators needed for the ERP computation. I believe however that recovery will be slower than showed in the Base Case ERP. For the Fed Funds Rate, I believe that it will further have to be increased throughout until mid-2023. Then it will remain stable until 4Q2023 when it will slowly start to decrease. For both, the quarterly average spread between 10y Treasury Rates and FFR and the VIX rate, my view is optimistic, but I have slightly slowed down the trend towards historic average values. For the S&P 500 estimation, I have simulated an increase of x*0,25% each upcoming quarter starting 2Q2023. I have paid attention to the average between 3Q2021 and 4Q2024 not exceeding the historical average of 2,69%, since I believe that recovery will be somewhat slow.
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Disclosure: The author of this article/model has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in the content represent the author’s opinions.