Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Indi Morel Category: Earnings Preview (Fiscal 4Q2020)
Model Description: This model predicts earnings and cash flows for Starbucks Corp (NASDAQ:SBUX) driven by estimates of comp-store sales and store count estimates. Ratio analysis is used to complete the financial statements. The Equity Risk Premium Model (ERP) uses the Fed Funds rate, 10-year U.S. Treasury rate, implied volatility, equity market returns, and the Constant Sharpe Approach, to estimate the Equity Risk Premium (ERP). The ERP and the Capital Asset Pricing Model (CAPM) are used together to calculate the required return on equity for the DCF-based share valuation within the Starbucks model.
Notes from the Model Developer: Although the pandemic may overshadow the traditional seasonal impact of the fourth quarter, Starbucks has shown a great ability to adapt to changes. Starbucks has, in the past, monitored consumer preference trends, launched loyalty and rewards programs, and reacted swiftly to other changes in industry dynamics. As such, it will continue to do so in the COVID-19 environment, which will cause sales to rebound quickly. Having a more neutral opinion, my estimates follow management’s guidance. Most assumptions used in this model are based on the trends in the U.S. market. However, it’s important to note that China is a big market for Starbucks, comprising a substantial part of its international segment. Therefore, assumptions for the international segment are heavily based on expectations for China. I believe we will not see a return to “business as usual”, meaning life as it was before the pandemic. Instead, I believe the world will adapt to a “new normal” by the end of the second quarter of 2021. Starbucks is preparing for the new normal by implementing new contactless experiences, pick-up and go stores, and curbside pick-up and drive-through services. With this vision, Starbucks should be able to see slight improvements in revenue, comp-stores sales, and transaction volume.
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.