Robert Christopher

Special situations, long only, value, growth
Robert Christopher
Special situations, long only, value, growth
Contributor since: 2012
Company: Robert Christopher
I have copied litigation information from the 10-K, in case anyone has not read it. Thanks.
Item 3.

Legal Proceedings

In the first quarter of fiscal 2011, Starbucks notified Kraft Foods Global, Inc. (“Kraft”) that we were discontinuing our distribution arrangement with Kraft on March 1, 2011 due to material breaches by Kraft of its obligations under the Supply and License Agreement between the Company and Kraft, dated March 29, 2004 (the “Agreement”), which defined the main distribution arrangement between the parties. Through our arrangement with Kraft, Starbucks sold a selection of Starbucks and Seattle's Best Coffee branded packaged coffees in grocery and warehouse club stores throughout the US, and to grocery stores in Canada, the UK and

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other European countries. Kraft managed the distribution, marketing, advertising and promotion of these products.
Kraft denies it has materially breached the Agreement. On November 29, 2010, Starbucks received a notice of arbitration from Kraft putting the commercial dispute between the parties into binding arbitration pursuant to the terms of the Agreement. In addition to denying it materially breached the Agreement, Kraft further alleges that if Starbucks wished to terminate the Agreement it must compensate Kraft as provided in the Agreement in an amount equal to the fair value of the Agreement, with an additional premium of up to 35% under certain circumstances.
On December 6, 2010, Kraft commenced a federal court action against Starbucks, entitled Kraft Foods Global, Inc. v. Starbucks Corporation , in the U.S. District Court for the Southern District of New York (the “District Court”) seeking injunctive relief to prevent Starbucks from terminating the distribution arrangement until the parties' dispute is resolved through the arbitration proceeding. On January 28, 2011, the District Court denied Kraft's request for injunctive relief. Kraft appealed the District Court's decision to the Second Circuit Court of Appeals. On February 25, 2011, the Second Circuit Court of Appeals affirmed the District Court's decision. As a result, Starbucks is in full control of our packaged coffee business as of March 1, 2011.
While Starbucks believes we have valid claims of material breach by Kraft under the Agreement that allowed us to terminate the Agreement and certain other relationships with Kraft without compensation to Kraft, there exists the possibility of material adverse outcomes to Starbucks in the arbitration or to resolve the matter. Although Kraft disclosed to the press and in federal court filings a $750 million offer Starbucks made to Kraft in August 2010 to avoid litigation and ensure a smooth transition of the business, the figure is not a proper basis upon which to estimate a possible outcome of the arbitration but was based upon facts and circumstances at the time. Kraft rejected the offer immediately and did not provide a counter-offer, effectively ending the discussions between the parties with regard to any payment. Moreover, the offer was made prior to our investigation of Kraft's breaches and without consideration of Kraft's continuing failure to comply with material terms of the agreements.
On April 2, 2012, Starbucks and Kraft exchanged expert reports regarding alleged damages on their affirmative claims. Starbucks claimed damages of up to $62.9 million from the loss of sales resulting from Kraft's failure to use commercially reasonable efforts to market Starbucks ® coffee, plus attorney fees. Kraft's expert opined that the fair market value of the Agreement was $1.9 billion. After applying a 35% premium and 9% interest, Kraft claimed damages of up to $2.9 billion, plus attorney fees. The arbitration hearing commenced on July 11, 2012 and was completed on August 3. Starbucks presented evidence of material breaches on Kraft's part and sought nominal damages from Kraft for those breaches. Kraft presented evidence denying it had breached the parties' Agreement and sought damages of $2.9 billion plus attorney fees. We expect a decision from the Arbitrator in the first half of fiscal 2013.
At this time, Starbucks believes an unfavorable outcome with respect to the arbitration is not probable, but as noted above is reasonably possible. As also noted above, Starbucks believes we have valid claims of material breach by Kraft under the Agreement that allowed us to terminate the Agreement without compensation to Kraft. In addition, Starbucks believes Kraft's damage estimates are highly inflated and based upon faulty analysis. As a result, we cannot reasonably estimate the possible loss. Accordingly, no loss contingency has been recorded for this matter.
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including certain employment litigation cases that have been certified as class or collective actions, but, except as noted above, is not currently a party to any legal proceeding that management believes could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

As Starbucks operates in 60 countries, it is fairly well diversified as to possible tax changes in any one country, in my opinion. To the best of my knowledge, Starbucks has not spoken to your question directly in its 10-K or 10-Q, except perhaps to briefly mention this as a possible risk factor. What Starbucks does say is that it does not tend to repatriate foreign earned profits back to the US, as these funds are normally reinvested overseas. Although the company has not announced any plans to return foreign profits to the US, to my knowledge, there could perhaps be substantial US taxes due in the unlikely event that this were to occur, in my view.

Both La Boulange and Evolution Fresh are parts of the company's growth strategy.
Starbucks is optimistic that La Boulange, acquired in the fourth quarter of its fiscal 2012 ended September 30, should be a driver of growth and profitability of the company's America's segment. The entire Americas segment represented about 71% of total company sales for its fiscal 2012.
Evolution Fresh is reported within the company's "Other" segment that represents about one percent of Starbuck's total sales.

Thank you very much for reading my report, and greatly appreciate your response.

Thank you very much for your very informed, sophisticated, insightful and generous comments. I do greatly appreciate your expertise, Sir, on Las Vegas Sands. My perception is that China could continue to be hot, so to speak, perhaps beyond some expectations. Thanks again. Robert

I really appreciate your comments, and please let me say that I do not believe that revenues should fall in 2013. I was just being very conservative and using a rounded figure for sales. Truth is, I don't guess I would expect much revenue growth over the next twelve months if the economy slows. My growth estimate is a long-term projection. I don't know that I would assign a higher P/E ratio with my 13.2% EPS growth estimate; however, a slightly higher multiple in the upper teens would not be unreasonable in my opinion. I really don't see anything exciting that would compel my to rush out and purchase these shares, other than modest, consistent growth, and with its higher long-term beta in my opinion, perhaps better performance than the market, if we enter another bull market.
It's Monday, November 12, 2012, and the Dow Jones Industrial Average is down roughly 1000 points from its 52-week high, or a market correction of less than ten percent. This would not be an alarm bell, but could signal the end of this Bull Market cycle to a flat market.
The Fiscal Cliff has already been priced into the Market to a large extent, and major budget cuts and significant tax increases are to be expected. The two wars plus the previous financial crisis are primarily responsible for the recent escalation in the National Debt, but measures must be taken to control the Debt. Looking at Greece, this should cease to be a major factor that otherwise would likely continue to increase the cost of capital and thereby diminish real growth in Europe.
Some real growth, if only modest, would be anticipated for the US in 2013, based on an outlook for a stimulative monetary policy as well as improving consumer sentiment. In view of upward sloping to flat trends in the Dow Jones Industrial Average over the last 12 and six months, respectively, the Market should trend relatively flat over the next six months.
Regarding Chipotle Mexican Grill, I believe this company's future growth faces two challenges: First, I believe that Chipotle has had some difficulty with attempting to increase menu prices without losing customers. Second, in my opinion, the company's net cash flow, after investments and capital spending, could have been inadequate at times. I would think that Chipotle's future growth rate in earnings per share would be impacted by these considerations, and could be significantly less than its impressive growth in recent years.

It's a gaming stock, not to be considered by anyone who may be uncomfortable with a very risky situation, and it's anyone's guess as what the future may or may not bring. Models are not reality, but they may be adjusted in a vain attempt to fit reality. Reality may be totally unpredictable and/or jagged and may almost never be in a straight line.
What does the consensus say about industry growth for the next five years? What are they saying about Macau and China? Does this company have a history of M&A activity, divestitures and overseas projects? What about the non-gaming area?
All some of us can try to do is read the tea leaves.