Starbucks Improving Across The Board: Is That Enough?

Ascendere Associates LLC February 12, 2010
Steve Castellano steve@ascenderellc.com
Starbucks Corp. (NasdaqGS: SBUX)

Sector: Consumer Discretionary
Industry: Restaurants
There are not many companies in which nearly every fundamental metric we look at is improving across the board. But
they do exist, and one such impressive company is Starbucks Corp.
At the current level, SBUX is a good option for growth investors that expect significant upside to current consensus
forecasts -- because we do think there is some chance of this occurring. SBUX is also currently a good stock idea for high
turnover portfolios driven by constantly updated relative value decisions, such as the Ascendere Long/Short Model
Portfolio. But given our preference for highlighting stock ideas that show good value against sustained operating
momentum, we would prefer portfolio managers wait for a better price, closer to $17-19, or at most at 15.2x the
consensus FY2011 EPS estimate. Such a purchase price would allow participation in a possible resurgent growth story
without being aggressive.
Our target 1yr value is $23, which is below the consensus average target of $25 and derived from a scenario analysis
indicating a realistic valuation range of $9-46. For the stock price to reach near the high end of our range, we think the
company would have to generate EPS approaching $1.70 in fiscal 2011 and show accelerating growth beyond. In
contrast, the consensus EPS estimate for FY2011 is $1.25 and the consensus high is $1.41. While these optimistic
scenarios are aggressive, they are also plausible under perfect conditions.
SBUX LTM FY+1 FY+2 LTM 5yr Avg Description: Starbucks Corporation
Insiders engages in the purchase, roasting, and sale
Stock Price $22.60 EPS: $ 0.76 EPS: $1.10 EPS: $1.25 ROE: 19.1% ROE: 30.2% Own 2.7% of whole bean coffees worldwide. It offers
EBITDA/ EBITDA/ Number of brewed coffees, related beverages and
Market Cap $16.8b P/E: 29.9 P/E: 20.5 P/E: 18.1 Capital 42.8% Capital 38.3% Analysts 19 complementary food items. It also
Debt to produces and sells various ready-to-drink
Enterprise Val $16.0b P/CF 11.0 P/CF 9.4 P/CF 8.6 Margin 9.7% Margin 9.3% Captial 14.0% beverages. Its brand portfolio includes
Dividend Starbucks, Seattle’s Best Coffee and others.
Beta 1.35 P/S: 1.7 P/S: 1.6 P/S: 1.6 Margin 5.7% Margin 6.0% Yield 0.0%
Starbucks Corp. is bucking the trend

We took a quick look at Starbucks in early 2009, and as generalists searching for the best relative opportunity among 3000+
stocks that trade on major U.S. exchanges, were not impressed. Fundamental metrics were trending poorly, international
markets were in full fledged recession, and a premium-branded coffee and related items seemed like easy things for the
consumer to give up in the quest for newfound frugality. New initiatives announced upon the return of Starbucks' founder
Harold Schultz to the CEO role in January 2008 did not seem to be having a measurable effect. The stock peaked close to $40 in
December 2006 and traded as low as$7 in 2008.
But March 2009 results marked the turning point. The cumulative effect of new initiatives focused on controlling operating
costs, improving operating efficiency, strengthening connections among customers and the closure of 900 stores and the
announced lay off of 7000 employees and attrition of thousands more have translated into significant operating momentum
which seems likely to continue through 2010 and perhaps beyond.
Impressive operating momentum since early 2009

Since the end of 2008, Starbucks has seen a significant decline in capital spending, operating capital has been reduced, and
various measures of profitability and cash flow have drastically improved. In more detail, since December 2008 Starbucks has
reduced estimated Operating Capital by $1.6b to $6.9b from $8.6b, while estimated adjusted operating profit has improved
Steve Castellano Ascendere Associates LLC

steve@ascenderellc.com Page 1
more than 3x to $762m from $211m over the same period. Anyway you look at it -- EBIT, adjusted EBITDA, free cash flow --
profitability has surged since December 2008 while the amount of capital required to create this profitability has declined. This
has helped the company generate a ROIC higher than its cost of capital for the first time in several quarters. In addition, this has
put $700m+ in cash on its balance sheet bringing the total to $1.4b cash and short-term investments. In the most recent
conference call the company said it expects to conclude work on a distribution strategy for this excess cash in the coming
months.
Starbucks learned valuable lessons in its domestic market

CEO Harold Schultz summarized the recent improvements in the company’s January 20, 2010 conference call transcribed by
Seeking Alpha for the fiscal first quarter that ended on 12/27/2009:
“This was a very satisfying quarter by any standard and follows three successive quarters of continued improvement in our
business. Our U.S.-company operated stores reached a significant milestone in Q1 as all regions reported positive comp growth
and our U.S.-licensed stores also delivered strong results. As in prior quarters, our business this quarter benefited mightily from
continued innovation from the success of our company wide efforts to improve customer experience from our continued laser
focus on controlling operating costs and improving operating efficiency and from the impact of decisive actions we took early in
2008.”
Given the significant operating improvements seen thus far, maybe it is not a surprise the stock has seen a 165% rally from a
March 2009 low of $8.27 to a recent close of $21.91, outperforming the S&P 500 return of 56% and the S&P Discretionary SPDR
(XLY) return of 78% over the same period. If estimates are revised further upward, there could be more room for SBUX to move.
Upside possible if company remains focused and if global economies improve

We find the current consensus estimates that imply continued improvements for ROIC and solid earnings growth believable and
perhaps containing some potential to move even higher, which makes us comfortable with not overly-weighting a negative
valuation scenario. The company seems to have learned some valuable lessons in its U.S. market, and has recently started
increasing marketing spending to drive revenue on some key growth platforms and initiatives. It is also increasing investment in
its well-received VIA instant coffee product and on efforts to "refresh" the designs of existing Starbuck stores. In addition, the
company intends to apply the lessons learned in the U.S. to international markets. For now, international efforts appear to be
concentrated in the U.K., France, Spain and China.
Starbucks believes China will become its largest market outside of the U.S. If Starbucks can drive revenue in China and other
international locations to one-half to two-thirds of the level of growth experienced in its early growth phase in the United States,
there could be significant upside to consensus revenue and earnings growth forecasts.
Relative valuation summary

Starbucks is currently trading at 20.2x NTM consensus EPS of $1.12 versus a 5yr average of 26.8x and a range of 10.1-53.4x.
Fifteen sell side analysts provide targets ranging $13 to $30 and average $25. Nineteen sell side analysts provide FY2011 EPS
estimates ranging from $1.15 to $1.41 and average $1.25.
On a relative EV/EBITDA basis, SBUX trades at a slight discount to a peer average, and on a PE basis it is at a premium. Given its
high growth prospects and ROIC profile, these multiples are justifiable and actually offer a slightly better adjusted value at this
snapshot in time -- but they do not point to an overwhelming bargain.
Scenario analysis
We have chosen 4 different scenarios in which to value Starbucks. Numerous underlying factors can be summarized in the long-
term earnings growth rates on a 10% WACC and 2.5% terminal growth rate -- 21%, 18%, 8% and negative 3%. A more aggressive
9% WACC and 3% terminal growth rate may be justifiable, and could positively impact our range of targets by about $1-10.
 The most realistic but conservative assumption in our opinion is the 8% growth scenario, which suggests the stock
deserves to trade at only about 17x the consensus NTM EPS estimate of about $1.12 or at about $19 one year from now.
 But If SBUX can beat and raise estimates throughout the next two years and get on track to close to 18% earnings
growth on average for the next 5 years and moving higher beyond that, perhaps the stock should be more appropriately
valued at $30, or about 18x an above-consensus-high FY2012 EPS estimate of $1.70. We are comfortable with these
assumptions for this particular scenario because we think they reflect the possibility of continued operating momentum
and a growing penchant for China and other countries to embrace a number of American brands.
 A $46 stock price target is justifiable under the right conditions, though a bit farfetched at the moment. Such a target
would have to assume flawless execution, faster than anticipated international expansion and a rebound in the global
economies so that the company could resume a growth rate seen 5 to 10 years ago. True believers would have to justify
a target earnings growth rate of 21% compounding to $2.80 by FY2015 and accelerating at a higher rate beyond.
 If Starbucks runs into additional problems or the economies falter again so that earnings essentially decline 3% on
average over the next few years, a fundamentally justifiable target could be $9 today.
Simple Microsoft Excel models for SBUX revenue growth and operating margin assumptions that we used to help generate
realistic scenarios for optimistic earnings growth are available at our website www.ascenderellc.com.
The current stock price embeds assumptions for continued operating momentum that can drive consensus estimates higher.
While that is possible, we recommend waiting for a pullback to the $17-19 level before purchasing this stock. Using a most likely
possible target range of $17 to $30 by next year does not provide an overwhelmingly compelling risk/reward with the stock at
$22. However, for the portfolio manager that is required to purchase a Consumer Discretionary stock immediately, or is
managing a portfolio with high turnover in which decisions can be quickly adjusted (such as the Ascendere Long/Short Model
Portfolio), SBUX in our opinion is the best idea at the moment.
Our current estimated stock price target for SBUX is $23, which is outlined in the table below.
We are aware of our seemingly contradictory recommendation -- that on a relative basis SBUX is slightly more attractive but on
a standalone basis is less so. This raises two basic questions though with very large implications: Is the entire Discretionary
sector is embedding overly optimistic assumptions on a global economic recovery? Or will SBUX in retrospect confirm our past
observations that in general sell side analyst estimates lag the market rather than anticipate it? It is probably a little bit of both.
Risks
Ascendere Associates LLC can makes no guarantee on the accuracy of the data, estimates, assumptions or forecasts in this
report. Investing in SBUX or any equity entails a high degree of risk, including the risk of total loss. This report is not a
solicitation to buy or sale any securities.

About Ascendere Associates LLC
J. Stephen Castellano – Steve founded Ascendere Associates LLC to provide custom equity research and financial consulting
services for institutional and high net worth clients. Steve has been involved in equity research, strategic studies and financial
writing since 1995, and has more than 10 years of experience in equity research analysis. At PaineWebber, Warburg Dillon Read
and Credit Lyonnais Securities he developed fundamental equity valuation models and conducted in-depth research on the steel
and telecom services industries. At Boston Private Value Investors, he developed quantitative models for stock idea generation
and also provided general fundamental equity research coverage. Steve received a MBA from the F. W. Olin School of Business
at Babson College (2005) and a BA from Oberlin College (1993). For more information, visit us at www.ascenderellc.com.
Steve’s career history is highlighted below:
 Ascendere Associates LLC (2009-Present)

 Boston Private Value Investors , Equity Research, Equity Research Analyst (2005-2009)
 Pyramid Research, Contract Consultant, Telecom Services (2002-2003)
 Credit Lyonnais Securities (USA), Equity Research, Telecom Services, Vice President (2000-2001)
 Warburg Dillon Read, Equity Research, Telecom Services, Research Associate (1999-2000)
 PaineWebber, Equity Research, Steel and Nonferrous Metals, Research Associate, Editor (1995-1999)

Summary of Various ROIC and Efficiency Ratios
Starbucks Corp.
Consumer Discretionary
Restaurants
SBUX
Operating Assets Components FQ FQ-1 FQ-2 FQ-3 FQ-4 FQ-5 FQ-6 FQ-7 FQ-8
Net PP&E 2,483 2,536 2,594 2,658 2,823 2,956 2,947 3,052 2,993
Goodwill 263 259 257 261 262 267 235 223 216
Other Intangibles 69 68 68 67 67 67 66 58 42
Other Long-term Assets 704 677 696 691 685 635 647 621 517
Net Working Capital (ex cash) (552) (211) (177) (150) (364) (50) (138) (169) (521)
Cash (estimated requirement) 900 666 337 295 396 322 350 372 535
Total Operating Assets 3,866 3,996 3,776 3,822 3,868 4,197 4,107 4,157 3,784
LTM EBITDA 1,523 1,336 1,244 1,132 1,119

Average Operating Assets 3,865 3,932 3,954 4,030 4,023
Back of Envelope ROIC 39.4% 34.0% 31.5% 28.1% 27.8%
NasdaqGS:SBUX Estimate Estimate Estimate Estimate Estimate

3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008
LTM EBITDA 1,839 1,816 1,771 1,677 1,623 1,530 1,343 1,244 1,132 1,123
Avg. Total Capital 4,436 4,249 4,021 3,797 3,683 3,556 3,529 3,538 3,604 3,589
EBITDA / Total Cap 41.5% 42.7% 44.0% 44.2% 44.1% 43.0% 38.1% 35.1% 31.4% 31.3%
LTM EBIT 1,288 1,268 1,227 1,129 1,068 970 780 647 532 517
Avg. Total Capital 4,436 4,249 4,021 3,797 3,683 3,556 3,529 3,538 3,604 3,589
EBIT / Total Cap 29.0% 29.9% 30.5% 29.7% 29.0% 27.3% 22.1% 18.3% 14.7% 14.4%
Earnings from Continuing Operations 870 848 829 793 769 568 391 246 88 172
Average Total Equity 3,932 3,732 3,509 3,289 3,072 2,886 2,714 2,600 2,525 2,449
Return on Equity 22.1% 22.7% 23.6% 24.1% 25.0% 19.7% 14.4% 9.5% 3.5% 7.0%
Estimate Estimate Estimate Estimate Estimate

NasdaqGS:SBUX 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008
NOPLAT 948 943 920 835 768 764 618 418 247 212
Economic Charge 716 717 719 717 716 718 695 735 689 719
Economic Profit 232 226 200 118 52 46 (76) (316) (442) (507)
Sequential growth 3% 13% 69% 128% 13% -160% -76% -28% -13% 23%
NOPLAT 948 943 920 835 768 764 618 418 247 212
Operating Capital 6,904 6,914 6,940 6,912 6,908 6,930 7,031 7,368 7,596 8,557
ROIC (NOPLAT / Operating Capital) 13.7% 13.6% 13.2% 11.9% 10.7% 10.2% 7.9% 5.2% 3.0% 2.6%
Sequential growth 1% 3% 12% 11% 5% 28% 52% 73% 17% -50%
Source: Ascendere Associates LLC forecasts, assumptions, consensus forecasts and Capital IQ data.

Competitor Overview

Starbucks Corp.
NasdaqGS:SBUX >---------------------------Calendar Year---------------------------<
EV / EV /
Company Stock Mkt Total Total Enterprise Rev EBITDA EPS EPS PE PE
Ticker Name Price Val Cash Debt Other Val 2010E 2011E 2010E 2011E 2010E 2011E
NasdaqGS:SBUX Starbucks Corp. $ 22.65 $ 16,771 $ 1,357 $ 550 $ 13 $ 15,977 1.5x 7.7x $ 1.12 $ 1.28 20.2x 17.7x
NYSE:MCD McDonald's Corp. 63.59 68,841 2,202 11,084 - 77,724 3.3x 8.6x $ 4.43 $ 4.82 14.4x 13.2x
NYSE:YUM Yum! Brands, Inc. 33.36 15,617 353 3,266 89 18,619 1.7x 7.4x $ 2.40 $ 2.69 13.9x 12.4x
NYSE:THI Tim Hortons Inc. 29.58 5,339 196 379 1 5,523 2.5x 8.5x $ 1.88 $ 2.11 15.7x 14.0x
NYSE:DRI Darden Restaurants, Inc. 38.99 5,420 62 1,805 0 7,162 1.0x 7.1x $ 2.87 $ 3.19 13.6x 12.2x
NYSE:CMG Chipotle Mexican Grill, Inc. 102.80 3,324 238 4 - 3,089 1.8x 9.1x $ 4.11 $ 4.89 25.0x 21.0x
NasdaqGS:PNRA Panera Bread Co. 73.58 2,298 173 - (0) 2,125 1.4x 7.9x $ 3.38 $ 3.90 21.8x 18.9x
NYSE: EAT Brinker International Inc. 17.81 1,797 110 591 - 2,278 0.7x 5.7x $ 1.46 $ 1.56 12.2x 11.4x
EV / EV /
Rev EBITDA EPS EPS PE PE
Calendar Year Comps 2010E 2011E 2010E 2011E 2010E 2011E
NasdaqGS:SBUX 1.5x 7.7x $ 1.12 $ 1.28 20.2x 17.7x
Peer Average 1.8x 7.8x 16.7x 14.7x

Peer Min 0.7x 5.7x 12.2x 11.4x
Peer Max 3.3x 9.1x 25.0x 21.0x

Sensitivity Analysis

Starbucks Corp.
Restaurants
NasdaqGS:SBUX $ 22.60 2/12/2010
Resurgent Optimistic Implied Pessimistic
>--------------------10-year Historical Range--------------------< 2000s
Low Average Median High YTD Scenario +8 Scenario +3 Consensus Scenario -3
Adjusted Present Value current $ 42 $ 28 $ 17 $ 9
Adjusted Present Value +12 months $ 46 $ 30 $ 19 $ 11
Unlevered equity discount rate 10.2% 10.2% 10.2% 10.2%

Tax shield discount rate 6.3% 6.3% 6.3% 6.3%
Levered equity discount rate 10.2% 10.2% 10.2% 10.2%

After tax cost of debt 4.4% 4.4% 4.4% 4.4%
WACC 10.0% 10.0% 10.0% 10.0%
Risk free rate 3.5% 3.5% 3.5% 3.5%

Market risk premium 7.1% 7.1% 7.1% 7.1%
Terminal growth rate 2.5% 2.5% 2.5% 2.5%
Equity beta 1.35 1.35 1.35 1.35

Industry asset beta, company levered 1.32 1.32 1.32 1.32
Industry asset beta 0.94 0.94 0.94 0.94
Next 5yr Sales CAGR 10.0% 6.7% 3.7% 0.7%

Next 5yr Free Cash Flow CAGR 12.6% 8.1% 2.1% -2.5%
Next 5yr EPS CAGR 21.1% 17.6% 8.1% -2.8%
ROIC FY2010E 27.4% 27.4% 27.4% 27.4%

ROIC FY2011E 42.7% 43.4% 31.8% 20.5%
ROIC FY2015E 82.7% 66.9% 43.0% 24.6%

Starbucks Corp.
Restaurants
NasdaqGS:SBUX $ 22.60 2/12/2010
Y/Y Sales Growth FY2010E -5.9% 18.2% 21.6% 29.9% 4.1% 5.0% 5.0% 5.0% 5.0%
Y/Y Sales Growth FY2015E 18.5% 6.0% 3.0% 0.0%
Gross Margin FY2010E 55.3% 57.6% 58.0% 59.2% 57.9% 55.0% 55.0% 55.0% 55.0%
Gross Margin FY2015E 59.4% 59.4% 57.9% 56.4%
Gross Margin Expansion 4.4% 4.4% 2.9% 1.4%
SG&A + R&D Margin FY2010E 37.4% 39.3% 39.6% 40.7% 37.5% 43.0% 43.0% 43.0% 43.0%
SG&A + R&D Margin FY2015E 41.0% 41.0% 44.0% 47.0%
SG&A Margin Expansion -2.0% -2.0% 1.0% 4.0%
EBITDA Margin FY2010E 12.2% 15.6% 15.8% 18.3% 18.3% 17.7% 17.7% 17.7% 17.7%
EBITDA Margin FY2015E 23.9% 23.9% 19.4% 14.9%
EBITDA Margin Expansion 6.2% 6.2% 1.7% -2.8%
EBIT Margin FY2010E 6.3% 9.6% 9.6% 13.2% 13.2% 12.0% 12.0% 12.0% 12.0%
EBIT Margin FY2015E 18.4% 18.4% 13.9% 9.4%
EBIT Margin Expansion 6.4% 6.4% 1.9% -2.6%
Debt FY2010E 5 404 177 1,270 550 557 557 557 557
Debt FY2015E 557 557 557 557
Cash FY2010E 118 445 339 1,357 1,357 1,871 1,872 1,872 1,872
Cash FY2015E 10,574 10,159 7,663 5,511

Starbucks Corp.
Restaurants
NasdaqGS:SBUX $ 22.60 2/12/2010
EPS FY2010E (+1 FY) 0.33 0.64 0.58 1.12 1.12 1.08 1.08 1.08 1.08
EPS FY2011E (+2 FY) 0.40 0.76 0.71 1.28 1.28 1.67 1.69 1.22 0.78
EPS FY2015E 2.80 2.42 1.59 0.94
Justified PE FY2010E (+1 FY) 20.2 42.6 28.1 17.5 10.2

Justified PE FY2011E (+2 FY) 17.7 27.5 17.9 15.5 14.2
Sales FY2010E (+1 FY) 10,259 10,264 10,264 10,264

Sales FY2011E (+2 FY) 10,756 10,902 10,594 10,286
Justified EV / Sales FY2010E (+1 FY) 3.1 2.0 1.2 0.7

Justified EV / Sales FY2011E (+2 FY) 2.9 1.9 1.2 0.7
EBITDA FY2010E (+1 FY) 1,820 1,821 1,821 1,821

EBITDA FY2011E (+2 FY) 2,472 2,506 1,958 1,438
Justified EV / EBITDA FY2010E (+1 FY) 17.1 11.3 6.9 3.8

Justified EV / EBITDA FY2011E (+2 FY) 12.6 8.2 6.4 4.8
Free Cash Flow FY2010E (+1 FY) 1,332 1,357 1,046 751
Free Cash Flow FY2011E (+2 FY) 26 17 10 6
Justified EV / Free Cash Flow FY2010E (+1 FY) 23.4 15.2 12.0 9.1
Justified EV / Free Cash Flow FY2011E (+2 FY) 25.8 17.1 10.4 5.7

WACC Assumptions

Peer Group Cost of Capital
Starbucks Corp. McDonald's Corp. Yum! Brands, Inc. Tim Hortons Inc. Darden Restaurants,Chipotle
Inc. Mexican Grill,
Panera
Inc. Bread Co.
Company NasdaqGS:SBUX NYSE:MCD NYSE:YUM NYSE:THI NYSE:DRI NYSE:CMG NasdaqGS:PNRA Average
Cost of Equity:
Beta S&P (5-yr monthly) 1.35 0.65 1.05 0.84 0.93 1.18 0.87 0.98
Industry average beta, levered 0.94 1.02 1.05 0.96 1.12 0.92 0.92 0.99
Current Risk Free Rate (US 10yr bond) 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Equity Risk Premium 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1% 7.1%
Cost of Equity 10.2% 10.8% 11.0% 10.4% 11.5% 10.1% 10.1% 10.6%
Cost of Debt:
Estimated Cost of Debt 4.9% 4.4% 5.7% 5.2% 5.1% 10.4% 0.0% 5.1%
Normalized Tax Rate 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 37.5%
After Tax Cost of Debt 3.1% 2.8% 3.5% 3.2% 3.2% 6.5% 0.0% 3.2%
Capital Structure:
Debt to Equity Ratio 3.5% 16.3% 21.3% 7.3% 34.4% 0.1% 0.0% 11.8%
Unlevered Beta 1.32 0.59 0.93 0.80 0.77 1.18 0.87 0.92
Cost of Capital
Equity 16,132 67,902 15,303 5,218 5,248 3,167 2,237 16,458
Debt 557 11,084 3,266 379 1,805 4 0 2,442
Market Value of Total Capitalization 16,689 78,986 18,569 5,597 7,052 3,171 2,237 18,900
Weighting
Equity 96.7% 86.0% 82.4% 93.2% 74.4% 99.9% 100.0% 90.4%
Debt 3.3% 14.0% 17.6% 6.8% 25.6% 0.1% 0.0% 9.6%
Cost
Equity 10.2% 10.8% 11.0% 10.4% 11.5% 10.1% 10.1% 10.6%
Debt 3.1% 2.8% 3.5% 3.2% 3.2% 6.5% 0.0% 3.2%
Weighted Average Cost of Capital (WACC) =
10.0% 9.6% 9.7% 9.9% 9.4% 10.1% 10.1% 9.8%

$17 Current Fair Value Price Derived in Part by
Consensus Average Estimates

Consensus
Implied by consensus FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020
9/27/2009 9/27/2010 9/27/2011 9/27/2012 9/27/2013 9/27/2014 9/27/2015 9/27/2020
Income Statement
Acquired sales - - - - - - - -
Disposed Sales - - - - - - - -
Total sales 9,775 10,264 10,594 11,028 11,470 11,928 12,286 14,243
Total sales growth 0.00% 5.00% 3.22% 4.10% 4.00% 4.00% 3.00% 3.00%
Gross margin 55.8% 55.0% 57.0% 57.6% 57.7% 57.8% 57.9% 58.0%
SG&A margin 41.1% 43.0% 44.0% 44.0% 44.0% 44.0% 44.0% 44.0%
EBITDA 1,992 1,821 1,958 2,111 2,202 2,302 2,384 2,777

EBITDA margin 20.4% 17.7% 18.5% 19.1% 19.2% 19.3% 19.4% 19.5%
EBIT 1,429 1,236 1,376 1,505 1,571 1,646 1,708 1,994

EBIT margin 14.62% 12.04% 12.98% 13.64% 13.70% 13.80% 13.90% 14.00%
Other recurring income - - - - - - - -

Nonrecurring income - - - - - - - -
Net interest expense (18) (9) 13 35 58 82 106 241
Tax rate 30.1% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0%
Earnings from Continuing Operations986 822 930 1,032 1,092 1,158 1,215 1,497
Shares outstanding 746 763 763 763 763 763 763 763
EPS from Continuing Operations 1.32 1.08 1.22 1.35 1.43 1.52 1.59 1.96
Dividend per share - - - - - - - -

Dividends - - - - - - - -
Cash Flow Statement

Cash from Operations 1,389 1,747 1,606 1,716 1,790 1,862 1,923 2,310
Cash from
CashInvesting
from Investing (446) (542) (551) (585) (621) (658) (692) (885)
Cash from Financing (1) (0) (0) - - - - -
Change in Cash 942 1,206 1,055 1,131 1,170 1,204 1,231 1,425
Free Cash Flow to the Firm

EBIAT 999 828 922 1,008 1,053 1,103 1,144 1,336
Depreciation 563 585 583 607 631 656 676 783
Capital investment (446) (542) (551) (585) (621) (658) (692) (885)
Adj working capital investment (161) (20) (2) (7) (8) (8) (6) (7)
Free cash flow 956 852 951 1,023 1,055 1,093 1,122 1,227
Economic Profit
Operating Capital 3,406 3,022 2,898 2,798 2,720 2,674 2,658 2,837
WACC (rough estimate) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Capital Charge 342 303 291 281 273 268 267 285
NOPAT (adjusted for leases, R&D) 999 828 922 1,008 1,053 1,103 1,144 1,336
Economic Profit 657 525 631 727 780 834 877 1,051
EP as % of Operating Capital 19.3% 17.4% 21.8% 26.0% 28.7% 31.2% 33.0% 37.1%
Adjusted Present Value

Unlevered equity discount rate 9.7% 9.7% 9.7% 10.2% 10.2% 10.2% 10.7%
Tax shield discount rate 6.0% 6.0% 6.0% 6.3% 6.3% 6.3% 6.5%
Terminal growth rate 2.0% 2.5% 3.0% 2.0% 2.5% 3.0% 2.0%
Current Value 17 18 19 16 17 17 15
+12 Months Value 19 20 21 18 19 20 17

Consensus
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020
9/27/2009 9/27/2010 9/27/2011 9/27/2012 9/27/2013 9/27/2014 9/27/2015 9/27/2020
Balance Sheet
Cash 666 1,872 2,927 4,058 5,228 6,432 7,663 14,407
Accounts Receivable 271 263 249 247 250 257 263 303
Inventory 665 545 514 510 517 531 544 626
Other Current Assets 434 419 395 392 398 408 418 481
Total Current Assets 2,036 3,099 4,085 5,206 6,393 7,628 8,887 15,817
Gross PP&E 5,701 6,242 6,793 7,378 7,999 8,657 9,349 13,368
Net PP&E 2,536 2,493 2,461 2,440 2,429 2,431 2,447 2,771
Other Fixed Assets 581 581 581 581 581 581 581 581
Total Fixed Assets 3,118 3,074 3,042 3,021 3,010 3,012 3,028 3,352
Total Assets 5,153 6,173 7,127 8,227 9,403 10,640 11,915 19,169
Accounts Payable 267 242 245 254 266 277 285 330
Other NIB Current Liabilities 1314 1537 1557 1617 1689 1758 1810 2096
Total NIB Current Liabilities 1581 1779 1803 1871 1955 2035 2094 2426
Total Debt 557 557 557 557 557 557 557 557
Capital Leases - - - - - - - -
Minority Interest - - - - - - - -
Shareholder Equity 3,046 3,867 4,798 5,829 6,921 8,079 9,294 16,217
Total Capital 3,614 4,436 5,366 6,398 7,489 8,647 9,862 16,785
Other Non Current Liabilities (42) (42) (42) (42) (42) (42) (42) (42)
Total Liabilities and SE 5,153 6,173 7,127 8,227 9,403 10,640 11,915 19,169
Working Capital
Current Assets Less Adj Cash 1,739 1,957 1,983 2,058 2,151 2,239 2,304 2,668
Current Liabilities Less Debt 1,581 1,779 1,803 1,871 1,955 2,035 2,094 2,426
Adj Net Working Capital 158 178 180 187 196 204 209 243
NWC as a % of Sales 1.6% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7% 1.7%
Adj Working Capital Turnover 62 61 59 60 60 60 60 60
Cash Cycle
Days Inventory in Stock 56 48 42 40 39 38 38 38
Days Sales Outstanding 10 10 9 8 8 8 8 8
Days Payables Outstanding 23 21 20 20 20 20 20 20
Cash Cycle 43 37 32 29 27 26 26 26
Operating Efficiency
NI / Sales 10.1% 8.0% 8.8% 9.4% 9.5% 9.7% 9.9% 10.5%
Sales / Operating Assets 287% 340% 366% 394% 422% 446% 462% 502%
Operating Assets / Equity 1.1 0.8 0.6 0.5 0.4 0.3 0.3 0.2
Operating ROE 32.4% 21.2% 19.4% 17.7% 15.8% 14.3% 13.1% 9.2%
Accounting Efficiency
(EBITDA - Capex) / Net Interest 86.4 135.4 NMF NMF NMF NMF NMF NMF
Debt/Equity 18% 16% 13% 10% 9% 7% 6% 4%
Debt/Total Capital 15% 14% 11% 9% 8% 7% 6% 3%
NI / Sales 10.1% 8.0% 8.8% 9.4% 9.5% 9.7% 9.9% 10.5%

Sales / Assets 189.7% 181.2% 159.3% 143.7% 130.1% 119.0% 108.9% 77.5%
Assets / Equity 1.7 1.9 1.7 1.6 1.5 1.4 1.4 1.2
ROE 32.4% 27.0% 24.1% 21.5% 18.7% 16.7% 15.0% 10.2%
ROA 19.1% 14.5% 14.0% 13.4% 12.4% 11.6% 10.8% 8.1%

ROI (Earnings / TotalCap) 27.3% 20.4% 19.0% 17.5% 15.7% 14.3% 13.1% 9.3%
ROIC (RetainEarn / TotalCap) 27.3% 20.4% 19.0% 17.5% 15.7% 14.3% 13.1% 9.3%
ROIC (Noplat / Operating Assets) 29.3% 27.4% 31.8% 36.0% 38.7% 41.2% 43.0% 47.1%
EBIT / Capital 39.5% 30.7% 28.1% 25.6% 22.6% 20.4% 18.5% 12.4%
EBITDA / Capital 55.1% 45.2% 40.0% 35.9% 31.7% 28.5% 25.8% 17.3%
Book value per share $ 4 $ 5 $ 6 $ 8 $ 9 $ 11 $ 12 $ 21

Consensus
Implied by consensus
Stock price 22.60

Shares outstanding 743.4 751.9
Market value 16,801
Cash (666)
Non operating assets -
Debt market value 557
Preferred stock market value -
Minority interest 11
Other non operating liabilities -
Enterprise Value 16,703
Unlevered Cost of Equity 10.2%

Pretax Cost of Debt 6.25%
Terminal growth rate 2.5%
Current WACC* 10.0%
Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period - 1 2 3 4 5 6 7 8 9 10
Adjusted Present Value FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020
Total Sales 9,775 10,264 10,594 11,028 11,470 11,928 12,286 12,655 13,034 13,426 13,828 14,243
EBIT 1,429 1,236 1,376 1,505 1,571 1,646 1,708 1,772 1,825 1,880 1,936 1,994
Tax rate 30% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33%
Cash income taxes 430 408 454 497 519 543 564 585 602 620 639 658
EBIAT 999 828 922 1,008 1,053 1,103 1,144 1,187 1,223 1,259 1,297 1,336
Depreciation 563 585 583 607 631 656 676 696 717 738 761 783
Capital Spending, recurring (446) (542) (551) (585) (621) (658) (692) (727) (763) (802) (843) (885)
Adj Working Capital Investment (161) (20) (2) (7) (8) (8) (6) (6) (7) (7) (7) (7)
Free cash flow to the entity 956 852 951 1,023 1,055 1,093 1,122 1,151 1,170 1,189 1,208 1,227
Residual value of free cash flows 16,258
Free cash flow plus residual value 852 951 1,023 1,055 1,093 1,122 1,151 1,170 1,189 1,208 17,485
Present value of future cash flows - 863 842 787 740 690 641 591 545 503 6,598
Value of unlevered firm 12,800
Discount interest tax shields at cost of debt to determine value of interest tax shields
- 1 2 3 4 5 6 7 8 9 10
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020
Total Debt $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557
Cash interest expense as % of Debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Cash interest expense 35 35 35 35 35 35 35 35 35 35 35 35
Interest tax shield 11 11 11 11 11 11 11 11 11 11 11
Residual value of interest tax shields 314
Interest tax shields plus residual value 11 11 11 11 11 11 11 11 11 11 325
Cost of debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Present value of future cash flows - 11 10 10 9 8 8 8 7 7 178
Value of interest tax shields 255
Cost of Potential Bankruptcy

Probability of bankruptcy 4.0%
Negative impact to PV 100.0%
Unlevered firm value 12,800
Expected bankruptcy costs (512)
Valuation
Value of unlelvered firm 12,800
Expected bankruptcy costs (512) Current Value
Enterprise value 12,542 Terminal Growth
Equity 2.0% 2.5% 3.0% Tax shield
Cash 666 Current ValueConsensus0.0973667582188642
9.7% $ 17.32 $ 17.96 $ 18.70 6.0%
Other non-operating assets - Current ValueConsensus0.102366758218864
10.2% $ 16.27 $ 16.81 $ 17.43 6.3%
Debt (557) Current ValueConsensus0.107366758218864
10.7% $ 15.34 $ 15.80 $ 16.33 6.5%
Preferred -
Minority Interest (11)
Other non operating liabilities - Value 12+ months
Value of equity 12,640 Terminal Growth
Value 12+ monthsConsensus0.0973667582188642
9.7% $ 19.36 $ 20.06 $ 20.87 6.0%
Shares outstanding 751.9 751.9 Value 12+ monthsConsensus0.102366758218864
10.2% $ 18.29 $ 18.88 $ 19.56 6.3%
Value per share 16.81 Value 12+ monthsConsensus0.107366758218864
10.7% $ 17.34 $ 17.85 $ 18.42 6.5%

Assumptions Required for a Target of $30
(The Consensus High)

Scenario +3
Optimistic base line FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020
9/27/2009 9/27/2010 9/27/2011 9/27/2012 9/27/2013 9/27/2014 9/27/2015 9/27/2020
Income Statement
Acquired sales - - - - - - - -
Disposed Sales - - - - - - - -
Total sales 9,775 10,264 10,902 11,676 12,493 13,368 14,170 18,963
Total sales growth 0.0% 5.0% 6.2% 7.1% 7.0% 7.0% 6.0% 6.0%
Gross margin 55.8% 55.0% 58.5% 59.1% 59.2% 59.3% 59.4% 59.5%
SG&A margin 41.1% 43.0% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0%
EBITDA 1,992 1,821 2,506 2,761 2,961 3,182 3,387 4,551

EBITDA margin 20.4% 17.7% 23.0% 23.6% 23.7% 23.8% 23.9% 24.0%
EBIT 1,429 1,236 1,906 2,118 2,274 2,446 2,607 3,508

EBIT margin 14.6% 12.0% 17.5% 18.1% 18.2% 18.3% 18.4% 18.5%
Other recurring income - - - - - - - -

Nonrecurring income - - - - - - - -
Net interest expense (18) (9) 16 46 78 113 150 372
Tax rate 30.1% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0%
Earnings from Continuing Operations986 822 1,288 1,450 1,576 1,715 1,847 2,600
Shares outstanding 746 763 763 763 763 763 763 763
EPS from Continuing Operations 1.32 1.08 1.69 1.90 2.07 2.25 2.42 3.41
Dividend per share - - - - - - - -

Dividends - - - - - - - -
Cash Flow Statement

Cash from Operations 1,389 1,747 1,935 2,188 2,354 2,523 2,685 3,713
Cash from
CashInvesting
from Investing (446) (542) (567) (619) (676) (738) (798) (1,178)
Cash from Financing (1) (0) (0) - - - - -
Change in Cash 942 1,206 1,368 1,569 1,678 1,786 1,887 2,535
Free Cash Flow to the Firm

EBIAT 999 828 1,277 1,419 1,523 1,639 1,747 2,350
Depreciation 563 585 600 642 687 735 779 1,043
Capital investment (446) (542) (567) (619) (676) (738) (798) (1,178)
Adj working capital investment (161) (20) (1) (12) (14) (15) (13) (18)
Free cash flow 956 852 1,309 1,430 1,520 1,622 1,716 2,197
Economic Profit
Operating Capital 3406 3022 2943 2824 2722 2651 2610 2706
WACC (rough estimate) 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
Capital Charge 342 303 295 284 273 266 262 272
NOPAT (adjusted for leases, R&D) 999 828 1277 1419 1523 1639 1747 2350
Economic Profit 657 525 982 1136 1250 1373 1485 2079
EP as % of Operating Capital 19.3% 17.4% 33.4% 40.2% 45.9% 51.8% 56.9% 76.8%
Adjusted Present Value

Unlevered equity discount rate 9.7% 9.7% 9.7% 10.2% 10.2% 10.2% 10.7%
Tax shield discount rate 6.0% 6.0% 6.0% 6.3% 6.3% 6.3% 6.5%
Terminal growth rate 2.0% 2.5% 3.0% 2.0% 2.5% 3.0% 2.0%
Current Value 28 30 31 27 28 29 25
+12 Months Value 31 32 34 29 30 31 28

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2020
9/27/2009 9/27/2010 9/27/2011 9/27/2012 9/27/2013 9/27/2014 9/27/2015 9/27/2020
Balance Sheet
Cash 666 1,872 3,239 4,808 6,486 8,272 10,159 21,490
Accounts Receivable 271 263 256 261 272 288 303 403
Inventory 665 545 529 540 563 595 627 834
Other Current Assets 434 419 407 415 433 458 482 641
Total Current Assets 2,036 3,099 4,431 6,024 7,755 9,612 11,571 23,367
Gross PP&E 5,701 6,242 6,809 7,429 8,105 8,842 9,640 14,711
Net PP&E 2,536 2,493 2,460 2,437 2,426 2,429 2,447 2,861
Other Fixed Assets 581 581 581 581 581 581 581 581
Total Fixed Assets 3,118 3,074 3,041 3,018 3,007 3,010 3,028 3,442
Total Assets 5,153 6,173 7,472 9,043 10,762 12,622 14,599 26,809
Accounts Payable 267 242 243 260 279 299 317 423
Other NIB Current Liabilities 1314 1537 1547 1651 1775 1901 2013 2691
Total NIB Current Liabilities 1581 1779 1790 1911 2054 2200 2329 3114
Total Debt 557 557 557 557 557 557 557 557
Capital Leases - - - - - - - -
Minority Interest - - - - - - - -
Shareholder Equity 3,046 3,867 5,155 6,605 8,181 9,896 11,743 23,169
Total Capital 3,614 4,436 5,724 7,174 8,749 10,464 12,311 23,737
Other Non Current Liabilities (42) (42) (42) (42) (42) (42) (42) (42)
Total Liabilities and SE 5,153 6,173 7,472 9,043 10,762 12,622 14,599 26,809
Working Capital
Current Assets Less Adj Cash 1,739 1,957 1,969 2,102 2,260 2,420 2,562 3,426
Current Liabilities Less Debt 1,581 1,779 1,790 1,911 2,054 2,200 2,329 3,114
Adj Net Working Capital 158 178 179 191 205 220 233 311
NWC as a % of Sales 1.6% 1.7% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6%
Adj Working Capital Turnover 62 61 61 63 63 63 63 63
Cash Cycle
Days Inventory in Stock 56 48 43 41 40 39 39 39
Days Sales Outstanding 10 10 9 8 8 8 8 8
Days Payables Outstanding 23 21 20 19 19 19 19 19
Cash Cycle 43 37 32 30 28 27 27 27
Operating Efficiency
NI / Sales 10.1% 8.0% 11.8% 12.4% 12.6% 12.8% 13.0% 13.7%
Sales / Operating Assets 287% 340% 371% 413% 459% 504% 543% 701%
Operating Assets / Equity 1.1 0.8 0.6 0.4 0.3 0.3 0.2 0.1
Operating ROE 32.4% 21.2% 25.0% 22.0% 19.3% 17.3% 15.7% 11.2%
Accounting Efficiency
(EBITDA - Capex) / Net Interest 86.4 135.4 NMF NMF NMF NMF NMF NMF
Debt/Equity 18% 16% 12% 9% 8% 6% 5% 3%
Debt/Total Capital 15% 14% 11% 9% 7% 6% 5% 2%
NI / Sales 10.1% 8.0% 11.8% 12.4% 12.6% 12.8% 13.0% 13.7%

Sales / Assets 189.7% 181.2% 159.8% 141.4% 126.2% 114.3% 104.1% 74.6%
Assets / Equity 1.7 1.9 1.8 1.6 1.5 1.4 1.4 1.2
ROE 32.4% 27.0% 33.3% 28.1% 23.9% 21.0% 18.7% 12.6%
ROA 19.1% 14.5% 18.9% 17.6% 15.9% 14.7% 13.6% 10.2%

ROI 27.3% 20.4% 25.4% 22.5% 19.8% 17.8% 16.2% 11.6%
ROIC (RetainEarn / TotalCap) 27.3% 20.4% 25.4% 22.5% 19.8% 17.8% 16.2% 11.6%
ROIC (Noplat / Net Assets) 29.3% 27.4% 43.4% 50.3% 56.0% 61.8% 66.9% 86.9%
ROC 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
CROC 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Book value per share 4 5 7 9 11 13 15 30

Scenario +3
Optimistic base line
Stock price 22.60

Shares outstanding 743.4 751.9
Market value 16,801
Cash (666)
Non operating assets -
Debt market value 557
Preferred stock market value -
Minority interest 11
Other non operating liabilities -
Enterprise Value 16,703
Unlevered Cost of Equity 10.2%

Pretax Cost of Debt 6.25%
Terminal growth rate 2.5%
Current WACC* 10.0%
Discount unlevered free cash flows at the unlevered cost of equity to determine value of the unlevered firm
Period - 1 2 3 4 5 6 7 8 9 10
Adjusted Present Value FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020
Total Sales 9,775 10,264 10,902 11,676 12,493 13,368 14,170 15,020 15,921 16,877 17,889 18,963
EBIT 1,429 1,236 1,906 2,118 2,274 2,446 2,607 2,779 2,945 3,122 3,310 3,508
Tax rate 30% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33%
Cash income taxes 430 408 629 699 750 807 860 917 972 1,030 1,092 1,158
EBIAT 999 828 1,277 1,419 1,523 1,639 1,747 1,862 1,973 2,092 2,217 2,350
Depreciation 563 585 600 642 687 735 779 826 876 928 984 1,043
Capital Spending, recurring (446) (542) (567) (619) (676) (738) (798) (862) (932) (1,008) (1,090) (1,178)
Adj Working Capital Investment (161) (20) (1) (12) (14) (15) (13) (14) (15) (16) (17) (18)
Free cash flow to the entity 956 852 1,309 1,430 1,520 1,622 1,716 1,812 1,902 1,996 2,095 2,197
Residual value of free cash flows 29,111
Free cash flow plus residual value 852 1,309 1,430 1,520 1,622 1,716 1,812 1,902 1,996 2,095 31,308
Present value of future cash flows - 1,187 1,177 1,135 1,098 1,054 1,010 961 915 871 11,814
Value of unlevered firm 21,223
Discount interest tax shields at cost of debt to determine value of interest tax shields
- 1 2 3 4 5 6 7 8 9 10
FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020
Total Debt $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557 $ 557
Cash interest expense as % of Debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Cash interest expense 35 35 35 35 35 35 35 35 35 35 35 35
Interest tax shield 11 11 11 11 11 11 11 11 11 11 11
Residual value of interest tax shields 314
Interest tax shields plus residual value 11 11 11 11 11 11 11 11 11 11 325
Cost of debt 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
Present value of future cash flows - 11 10 10 9 8 8 8 7 7 178
Cost of Potential Bankruptcy

Probability of bankruptcy 4.0%
Negative impact to PV 100.0%
Unlevered firm value 21,223
Expected bankruptcy costs (849)
Valuation
Value of unlelvered firm 21,223
Expected bankruptcy costs (849) Current Value
Enterprise value 20,629 Terminal Growth
Cash 666 Current ValueScenario
9.7% +30.0973667582188642
$ 28.45 $ 29.57 $ 30.86 6.0%
Other non-operating assets - Current ValueScenario
10.2% +30.102366758218864
$ 26.62 $ 27.57 $ 28.65 6.3%
Debt (557) Current ValueScenario
10.7% +30.107366758218864
$ 25.01 $ 25.81 $ 26.72 6.5%
Preferred -
Minority Interest (11)
Other non operating liabilities - Value 12+ months
Value of equity 20,727 Terminal Growth
Value 12+ monthsScenario
9.7% $ +30.0973667582188642
31.11 $ 32.34 $ 33.75 6.0%
Shares outstanding 751.9 751.9 Value 12+ monthsScenario
10.2% $ +30.102366758218864
29.24 $ 30.28 $ 31.47 6.3%
Value per share 27.57 Value 12+ monthsScenario
10.7% $ +30.107366758218864
27.59 $ 28.47 $ 29.48 6.5%

Consensus Quarterly Estimates
and Implied Estimates

Days in Period Dep 91 91 91 91 91 91 91 91
Period Date 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008 9/28/2008 6/29/2008 3/30/2008
Period +5Q +4Q +3Q +2Q +1Q Last QTR QTR-1 QTR-2 QTR -3 QTR -4 QTR -5 QTR -6 QTR -7
Average Consensus Estimates - - -
Revenue 2,535 2,856 2,685 2,469 2,389 2,723 2,422 2,404 2,333 2,615 2,515 2,574 2,526
Gross Profit 1,238 1,474 1,314 1,221 1,162 1,577 1,381 1,361 1,290 1,418 1,326 1,411 1,419
SG&A 952 1,072 1,008 927 897 1,022 981 925 924 1,042 1,029 1,074 1,045
R&D - - - - - - - - - - - - -
EBITDA 425 543 443 428 402 498 349 374 309 311 250 262 300
Depreciation 139 141 137 134 136 138 140 141 141 141 173 145 146
EBIT (or EBT) 286 402 307 294 266 360 209 233 168 170 77 117 154
Income (recurring earnings) 198 273 203 196 176 254 167 172 117 109 70 84 105
Income (reported) 186 248 203 196 166 242 150 152 25 64 5 (7) 109
NOPLAT 5 23 85 67 4 146 200 172 35 (207) (218) (204) (95)

EP 6 26 82 66 6 122 240 126 64 (95) (222) (232) (63)
Free Cash Flow 236 343 217 228 231 345 274 283 259 (29) (8) (38) (43)
# of Consensus Estimates
Revenue 4 5 15 15 15
Gross Profit - - - - -
SG&A - - - - -
EBITDA 1 1 7 7 7
Depreciation - - - - -
EBIT (or EBT) 3 3 15 15 15
Income (recurring earnings) 3 3 14 14 13
Income (reported) 1 1 5 5 5
NOPLAT - - - - -
EP - - - - -
Free Cash Flow - - - - -
Margins 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008
Revenue growth 6.1% 4.9% 10.9% 2.7% 2.4% 4.1% -3.7% -6.6% -7.6% -5.5% 3.1% 9.1% 12.0%
Gross margin 48.8% 51.6% 48.9% 49.4% 48.7% 57.9% 57.0% 56.6% 55.3% 54.2% 52.7% 54.8% 56.2%
SG&A margin 37.5% 37.5% 37.5% 37.5% 37.5% 37.5% 40.5% 38.5% 39.6% 39.8% 40.9% 41.7% 41.4%
R&D margin 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
EBITDA margin 16.8% 19.0% 16.5% 17.3% 16.8% 18.3% 14.4% 15.6% 13.2% 11.9% 9.9% 10.2% 11.9%
Depreciation margin 5.3% 5.3% 5.3% 5.3% 5.4% 5.1% 5.8% 5.9% 6.1% 5.4% 6.9% 5.6% 5.8%
EBIT margin (or EBT) 11.3% 14.1% 11.4% 11.9% 11.1% 13.2% 8.6% 9.7% 7.2% 6.5% 3.1% 4.5% 6.1%
Income (recurring earnings) 7.8% 9.5% 7.6% 7.9% 7.4% 9.3% 6.9% 7.2% 5.0% 4.2% 2.8% 3.3% 4.1%
Income (reported) 7.3% 8.7% 7.6% 7.9% 6.9% 8.9% 6.2% 6.3% 1.1% 2.5% 0.2% -0.3% 4.3%

Economic Profit Model
(Implied by Consensus)

ECONOMIC PROFIT MODEL
Starbucks Corp.
NasdaqGS:SBUX
8.5%
Economic Profit Model 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008 9/28/2008 6/29/2008 3/30/2008 12/30/2007
Adjusted Working Capital 102 101 99 97 96 96 94 95 97 99 100 100 98 95
Net PP&E 2,450 2,461 2,488 2,463 2,460 2,483 2,536 2,594 2,658 2,823 2,956 2,947 3,052 2,993
Other fixed assets 4,352 4,352 4,352 4,352 4,352 4,352 4,400 4,678 4,841 5,636 5,336 5,068 5,100 4,856
Operating Capital (McKinsey) 6,904 6,914 6,940 6,912 6,908 6,930 7,031 7,368 7,596 8,557 8,393 8,115 8,250 7,944
Cost of Debt 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 4.9% 4.7% 4.4% 4.4% 4.4% 4.8% 4.9% 5.4%
Cost of Equity 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.1% 10.2% 9.5% 8.9% 10.6% 10.7% 10.2% 10.8%
WACC* 10.4% 10.4% 10.4% 10.4% 10.4% 10.4% 9.9% 10.0% 9.1% 8.4% 9.9% 10.2% 9.7% 10.5%
Economic Charge 716 717 719 717 716 718 695 735 689 719 831 827 800 831
EBIT 1,288 1,268 1,227 1,129 1,068 970 780 647 532 517 661 794 897 958
Interest on Operating Leases 162 166 170 176 183 197 194 193 187 188 184 187 182 187
R&D Expenditure - - - - - - - - - - - - - -
R&D Amortization - - - - - - - - - - - - - -
Goodwill Amortization 2 2 2 2 2 2 2 2 2 2 2 1 1 1
Adjustment for Provisions and Extraordinary Items (246) (236) (228) (244) (275) (195) (195) (311) (398) (247) (168) (48) 111 108
Adjusted EBITA 1,206 1,200 1,170 1,062 977 973 780 530 322 460 679 934 1,192 1,255
Effective Tax Rate 31.4% 31.4% 31.4% 31.4% 31.4% 31.4% 30.1% 29.5% 10.9% 25.7% 31.3% 33.8% 35.6% 36.1%
Operating tax rate 21.5% 21.5% 21.5% 21.5% 21.5% 21.5% 20.8% 21.1% 23.5% 54.0% 38.2% 31.7% 29.3% 25.3%
Taxes on EBITA (259) (258) (251) (228) (210) (209) (162) (112) (76) (248) (260) (296) (350) (318)
Increase in deferred taxes (smoothed) - - - - - - - - - - - - - -
NOPLAT 948 943 920 835 768 764 618 418 247 212 419 638 842 937
Estimate Estimate Estimate Estimate Estimate
NasdaqGS:SBUX 3/31/11 12/31/10 9/30/10 6/30/10 3/31/10 12/27/2009 9/27/2009 6/28/2009 3/29/2009 12/28/2008
NOPLAT 948 943 920 835 768 764 618 418 247 212 419 638 842 937
Economic Charge 716 717 719 717 716 718 695 735 689 719 831 827 800 831
Economic Profit 232 226 200 118 52 46 (76) (316) (442) (507) (412) (190) 42 106
Sequential growth 3% 13% 69% 128% 13% -160% -76% -28% -13% 23% 117% -549% -60% 442%
NOPLAT 948 943 920 835 768 764 618 418 247 212 419 638 842 937
Operating Capital 6,904 6,914 6,940 6,912 6,908 6,930 7,031 7,368 7,596 8,557 8,393 8,115 8,250 7,944
ROIC (NOPLAT / Operating Capital) 13.7% 13.6% 13.2% 11.9% 10.7% 10.2% 7.9% 5.2% 3.0% 2.6% 5.2% 8.3% 11.4% 13.4%
Sequential growth 1% 3% 12% 11% 5% 28% 52% 73% 17% -50% -37% -28% -15% 2%

Charts and Other

Starbucks Corp. Price 22.6
SBUX NTM EPS $ 1.12
Consumer Discretionary NTM PE 20.2
Restaurants R/R 0.6 to 1
Price / Earnings (NTM) vs. Stock Price

45.0 $45
40.0 $40
35.0 $35
30.0 $30
P
P 25.0 $25 r
/ i
20.0 $20
E c
15.0 $15
e
10.0 $10
5.0 $5
0.0 $-
F-00
F-01
F-02
F-03
F-04
F-05
F-06
F-07
F-08
F-09
F-10
M-00
M-01
M-02
M-03
M-04
M-05
M-06
M-07
M-08
M-09
A-00
A-01
A-02
A-03
A-04
A-05
A-06
A-07
A-08
A-09
N-00
N-01
N-02
N-03
N-04
N-05
N-06
N-07
N-08
N-09
P/E Average +1 St. Dev. -1 St. Dev. Stock Price
Max up to ten years Three years One year One year historically implied target range
04/28/00 to 02/12/10 02/16/07 to 02/12/10 02/13/09 to 02/12/10 NTM EPS Target $ 22.60
Max PE 40.0 04/26/02 Max PE 40.0 04/26/02 Max PE 23.8 09/18/09 Max EPS $ 1.22 $ 29 29%
Average PE 28.6 Average PE 28.6 Average PE 19.7 Average EPS $ 1.12 $ 22 -3%
Min PE 10.0 11/21/08 Min PE 10.0 11/21/08 Min PE 11.2 03/06/09 Min EPS $ 1.01 $ 11 -50%

Ticker: SBUX
Company: Starbucks Corp.
SBUX 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 2/12/2010 Last 5 years
TEV / NTM Total Revenue Average 2.9x 3.1x 2.1x 1.1x 1.2x 1.6x 1.8x
High 3.9x 3.6x 2.9x 1.4x 1.7x 1.7x 3.9x
Low 2.4x 2.6x 1.4x 0.7x 0.7x 1.5x 0.7x
Close 3.0x 2.8x 1.4x 0.8x 1.7x 1.5x 1.5x
TEV / NTM EBITDA Average 16.9x 18.5x 12.8x 7.5x 7.8x 9.4x 11.4x
High 22.1x 21.2x 17.6x 9.0x 10.5x 10.4x 22.1x
Low 13.8x 15.4x 8.7x 4.7x 4.7x 8.3x 4.7x
Close 17.1x 17.2x 8.9x 5.6x 10.2x 8.6x 8.6x
TEV / NTM EBIT Average 23.9x 26.6x 18.2x 11.8x 12.3x 13.8x 16.8x
High 32.2x 30.8x 24.8x 14.5x 15.7x 15.4x 32.2x
Low 19.6x 20.9x 12.6x 7.5x 7.5x 12.2x 7.5x
Close 25.5x 24.2x 12.9x 9.1x 15.1x 12.6x 12.6x
Price / NTM EPS Average 40.5x 45.1x 29.4x 17.7x 18.5x 21.3x 26.8x
High 53.4x 53.0x 40.9x 21.5x 23.8x 23.5x 53.4x
Low 32.9x 37.4x 19.5x 10.1x 11.1x 19.4x 10.1x
Close 40.6x 39.9x 20.0x 12.9x 22.9x 20.2x 20.2x
Source: Capital IQ, Inc. data


Starbucks Improving Across The Board: Is That Enough?

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Starbucks Improving Across The Board: Is That Enough?

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Ascendere Associates LLC February 12, 2010

Steve Castellano steve@ascenderellc.com

Starbucks Corp. (NasdaqGS: SBUX)

Starbucks Corp. is bucking the trend

Impressive operating momentum since early 2009

Steve Castellano Ascendere Associates LLC

Starbucks learned valuable lessons in its domestic market

Upside possible if company remains focused and if global economies improve

Relative valuation summary

Steve Castellano Ascendere Associates LLC

Steve’s career history is highlighted below:

 Ascendere Associates LLC (2009-Present)

Steve Castellano Ascendere Associates LLC

LTM EBITDA 1,523 1,336 1,244 1,132 1,119

NasdaqGS:SBUX Estimate Estimate Estimate Estimate Estimate

Estimate Estimate Estimate Estimate Estimate

Steve Castellano Ascendere Associates LLC

Steve Castellano Ascendere Associates LLC

Peer Average 1.8x 7.8x 16.7x 14.7x

Steve Castellano Ascendere Associates LLC

Steve Castellano Ascendere Associates LLC

Unlevered equity discount rate 10.2% 10.2% 10.2% 10.2%

Levered equity discount rate 10.2% 10.2% 10.2% 10.2%

Risk free rate 3.5% 3.5% 3.5% 3.5%

Equity beta 1.35 1.35 1.35 1.35

Next 5yr Sales CAGR 10.0% 6.7% 3.7% 0.7%

ROIC FY2010E 27.4% 27.4% 27.4% 27.4%

Steve Castellano Ascendere Associates LLC

Steve Castellano Ascendere Associates LLC

Justified PE FY2010E (+1 FY) 20.2 42.6 28.1 17.5 10.2

Sales FY2010E (+1 FY) 10,259 10,264 10,264 10,264

Justified EV / Sales FY2010E (+1 FY) 3.1 2.0 1.2 0.7

EBITDA FY2010E (+1 FY) 1,820 1,821 1,821 1,821

Justified EV / EBITDA FY2010E (+1 FY) 17.1 11.3 6.9 3.8

Steve Castellano Ascendere Associates LLC

Steve Castellano Ascendere Associates LLC

Steve Castellano Ascendere Associates LLC

Steve Castellano Ascendere Associates LLC

EBITDA 1,992 1,821 1,958 2,111 2,202 2,302 2,384 2,777

EBIT 1,429 1,236 1,376 1,505 1,571 1,646 1,708 1,994

Other recurring income - - - - - - - -

Net interest expense (18) (9) 13 35 58 82 106 241

Dividend per share - - - - - - - -

Cash Flow Statement

Free Cash Flow to the Firm

Adjusted Present Value

Steve Castellano Ascendere Associates LLC

NI / Sales 10.1% 8.0% 8.8% 9.4% 9.5% 9.7% 9.9% 10.5%

ROA 19.1% 14.5% 14.0% 13.4% 12.4% 11.6% 10.8% 8.1%

Steve Castellano Ascendere Associates LLC

Stock price 22.60

Unlevered Cost of Equity 10.2%

Value of unlevered firm 12,800

Value of interest tax shields 255

Cost of Potential Bankruptcy

Steve Castellano Ascendere Associates LLC

Steve Castellano Ascendere Associates LLC

EBITDA 1,992 1,821 2,506 2,761 2,961 3,182 3,387 4,551

EBIT 1,429 1,236 1,906 2,118 2,274 2,446 2,607 3,508

Other recurring income - - - - - - - -

Net interest expense (18) (9) 16 46 78 113 150 372

Dividend per share - - - - - - - -

Cash Flow Statement