- Term Papers and Free Essays


Essay by   •  December 17, 2010  •  701 Words (3 Pages)  •  1,182 Views

Essay Preview: Check

Report this essay
Page 1 of 3


By the Numbers

The coffee king's stock is soaring-but there are hidden risks for investors buying now

IF YOU THINK there's already a Starbucks on every corner, chairman Howard Schultz has news for you: He's just warming up. In October the head of the world's largest coffee-shop chain said he plans to more than triple the number of stores, to 40,000, with half in the U.S. and half overseas. The target supplants Schultz's previous goal of 30,000 stores as he tries to challenge Yum Brands and McDonald's as the world's largest restaurant chain.

Schultz, with his usual flair, also gave investors a peek into the company's pipeline. No longer a mere Java joint, Starbucks is increasingly looking to become an arbiter of culture. Starbucks executives announced that the company had reached an agreement with Apple that will give consumers the ability to preview, buy, and download a variety of Starbucks' Hear Music titles from the iTunes store. And for the coming holiday season, Starbucks will begin selling a specially packaged DVD of White Christmas at its coffee shops this month. Investors can expect Schultz to unveil even more goodies when Starbucks reports its fiscal 2006 financial results on Nov. 16.

News of the amped-up expansion plans certainly impressed Wall Street, as the company's stock jumped 8%, registering the biggest one-day gain in nearly a year. In fact, Starbucks shares now sell for a staggering 52 times the company's earnings for the past 12 months, according to Baseline. That makes the stock slightly more expensive than Google, which trades at 51 times trailing earnings.

The lofty P/E indicates that investors are highly enthusiastic about the stock, but not everyone is so perky about Starbucks' prospects. One skeptic is David Trainer, founder of New Constructs, an independent equity research firm based in Nashville. Trainer, a former auditor at Arthur Andersen, makes a living poring over financial statements looking for holes. He says that Starbucks will have to achieve extraordinary growth to justify its current valuation. And he contends that investors are drastically overestimating Starbucks' profitability, largely because they're overlooking billions of dollars in off-balance-sheet debt.

Like many chain stores, Starbucks classifies the leases on its shops as "operating leases." In accordance with accounting rules, it doesn't have to reflect the cost of those leases on its balance sheet; it simply books the rent expense on its income statement. But the lease obligations are still debt to Starbucks. How much? Digging through the footnotes from the company's financials at the end of its last fiscal year, Trainer estimates that the present value of the company's future lease liabilities is a hefty $2.7 billion, roughly 10% of the company's market value. Once he includes that as part of he company's debt,



Download as:   txt (4.5 Kb)   pdf (78.3 Kb)   docx (10.4 Kb)  
Continue for 2 more pages »
Only available on
Citation Generator

(2010, 12). Check. Retrieved 12, 2010, from

"Check" 12 2010. 2010. 12 2010 <>.

"Check.", 12 2010. Web. 12 2010. <>.

"Check." 12, 2010. Accessed 12, 2010.