Starbucks Corp (NASDAQ:SBUX) Earnings Model
Author: Ziaullah Anwar, Published: October 23, 2021 Category: Earnings Preview (Prior to the F4Q2021 SBUX Results)
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Notes From the Model Developer - My Forecast is based on the following considerations:
The US stores count will not grow as much as the management expect. I think based on my market observation the Starbucks will face a lot of competition from Dunkin Donuts, Panera Bread, and stores alike.
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Based on my observation of the market the Starbucks profit margin will be going lower till 2024 due to supply chain issues, tight labor market and inflation (utilities and other expenses will go higher). Below are more details:
- The fear of inflation and the employees expectation to received increased wages might hurt the profit margins due to the fact that Starbucks won't be able to pass that on to customers due to fear of losing customers.
- The supply chain management might impact the profit margin meaning the cost of coffee might go up as a result it might impact the Starbucks profit margin.
- Work from home might also impact the profit margin in the long run once people are allowed to work few days from home permanently.
- I have all the expenses increased by decent percentage to reflect my above reasoning. I have all those changes added to new tab in excel sheet.
The rise in risk free rate to 2.5% (10 year UST) will also impact the Starbucks cost of debt. Meaning They won't be able to raise money at cheaper price. If they issue bond they need to increase the coupon on those bonds at high Yield to maturity. As result their discounted cash flow will be impacted, which means their multiples will be impacted as well. At their profit margins lowers, their ability to issue bonds at cheaper will be impacted due to the risk free rate increasing, and the customer having more alternative options like Panera bread, and Dunkin Donuts might impact the customer's loyalty as well in the long run. Therefore, I have them grow only at 10%.
Multiple-Based Valuation: I have a bearish view of Starbucks. I think their current multiples are too high and doesn't take into account the competition, inflation, and expenses. As Dunkin Donuts, Penera Bread, and other story start looking into expanding their offerings. They will steal customer from Starbucks. I used to be a loyal fun of starbucks but since trying Dunkin Donuts, I go there more. Its a lot cheaper and has more offerings. I think Starbucks multiple is too expensive. I think as the risk free rate goes up that will effect their discounted cash flow, which will impact their multiples. Also, inflation is real and its here. It will heat up pretty soon. As a result, employees want fair/meaningful wage so they can effort basic livings. That will impact Starbucks profit margin,
ERP Model Assumptions: I think the Federal Reserve will start increasing the Fed Fund rate by 90 basis point around the 1Q 2023 due to the fact that it needs deal with inflation. I put 30 on S&P 500 Vix due to the fact that there will be a lot of volatility in the market. A lot of companies with high multiples like Starbucks will sell off. I have -15% market return during the same period because if there is high inflation, which might lead to recession as a result the return on the equities and Starbucks will be negative.
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.