Analysis of Starbucks

Analysis of Starbucks

Svetlana Mezgova

Jessica Smith

Central Washington UniversityFinance

Analysis Of Starbucks

Table of ContentsCompany Profile:.........................................................................................................................................3

Financial Analysis:....................................................................................................................................6

Income Statement...............................................................................................................................6

Balance Sheet:.....................................................................................................................................8

Ratio Analysis.......................................................................................................................................9

Recommendation:.....................................................................................................................................10

References:................................................................................................................................................12

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Company Profile:

Starbucks opened its first store in 1971, in Seattle’s Pike Place market. From the first little

coffee shop it grew into a multi-national corporation. Starbucks became a place for people to

gather and talk because Howard Shultz was inspired by the Italian espresso bars in Milan and

wanted to bring that experience to people around the world. By 1996, Starbucks had

expanded to 1,015 stores and opened its first international store located in Japan then

followed by Singapore. In the years that followed Starbucks became a name known in most

of the world. As of 2015 they have 22,519 stores open on nearly every continent.

Figure 1: Countries with Starbucks 2014 qz.com

Starbucks is known as a coffee shop; however they sell a wide range of products like tea,

smoothies, baked goods, sandwiches, salads, yogurts, and fruits. They cater their goods to fit

their various targeted markets.

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According to Renee O’Farrell, “Starbucks’ primary target market is men and women aged 25

to 40. (O’Farrell, 2016),” accounting for nearly 50% of their customer base. Since a majority

of their customers reside in the cities with moderate to high income, they market their brand

to keep up with the urban styles and trends but also try to keep their company focused on

giving back to the community. They started many social programs like paying tuition for

their employees or partners as they prefer to call them and extending that program to the

families of their military partners. They locate many of their stores near college campuses to

give young adults a place to work, meet people, and complete their assignments in a safe and

comfortable environment. Young adults make up approximately 40% of their target

customers, the rest occupied by kids and teens. Starbucks created kid friendly portions

however they do not officially cater to little kids. Another part of their target market is based

from their sales of coffee beans and merchandise. They sell their products in grocery stores

and to restaurants, products ranging from coffee beans to mugs to coffee machines as well as

various other drinks.

The Starbucks brand is one of their greatest strengths. It is known for its good quality,

pleasant service, and free Wi-Fi. The brand has customer loyalty which is rewarded through

different rewards programs and ways to make the experience easier and quicker for those in a

hurry. Its many locations are picked to be easily spotted by many people; which is also the

reason many people choose Starbucks to meet with friends and colleagues. Because of its

brand, Starbucks has an advantage over its competition. People know what to expect, it is

easily recognizable and fits a variety of needs, like getting a bite to eat or having a quiet

place to work. Due to its high customer loyalty, its sales keep growing and they keep

expanding their number of stores and locations like their recent opening of a store in Panama.

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Although Starbucks is continually growing and expanding into many regions, its product is

considered a luxury good. Food and coffee is typically considered a necessity item or normal

good, however, Starbucks is a brand associated with luxury. As mentioned above, much of

their market is targeted towards the moderate to high income demographic. As long as the

economy prospers luxury goods will sell well, but when the economy takes a turn for the

worse, spendable income will be saved and used mostly for necessary goods. This is one of

Starbucks’s major weaknesses. When the economy turns, and people will have less to spend,

Starbucks may suffer a reduction of sales and their expansion of store locations may slow

down. Another weakness of Starbucks is their image in Europe. “Coffee drinkers in Italy or

France, for example, may not take Starbucks seriously as a seller of coffee, just as they may

not take American wines as seriously as French or Italian wines.” (Iason Dalavagas, 2016).

Although inspired by Italian coffee culture, Starbucks has an image of a large American

corporate structure which may be dissuading certain cultures in Europe who prefer a more

traditional experience.

According to Investopedia, “In the last few years, Starbucks…has entered into a battle,

fighting Dunkin' Donuts and McDonald's for the top position as coffee king.” Although

originally a brand focused on donuts, Dunkin Donuts in the last decade and a half has been

focusing on expanding their coffee options. McDonalds on the other hand, has a large, varied

menu and generated a higher income last year than either Dunkin Donuts or Starbucks and

has been expanding their selection of drinks, particularly coffees, since the mid 2000’s. All

three companies sell their coffee beans in retail store, however that market is dominated by

companies like Folgers and Maxwell House.

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Financial Analysis:

Income Statement

Over the past three years Starbucks has enjoyed a steady increase in revenue, from $16.45 billion

in 2014 to $19.16 billion in 2015 to $21.32 billion in 2016. Based on the research and the

provided revenue, it seemed that Starbucks was more successful from 2014 to 2015 when they

grew $2.71 billion in revenue, unlike the following year when their revenue growth slowed to

$2.16 billion. Even with a growing industry it seems like that the company isn’t showing the

profits that would be expected based on all other data. The difference doesn’t seem that

significant, however it could be explained by the various programs and promises the company

made to the public.

Figure 2 Yahoo Finance Revenue and Earnings Graph

Mimicking revenues trend of growth, Starbucks’s total operating expenses increased as well. In

2014 their expenses were $13,635 million, in 2015 they were $15,811.6 million, and in 2016

they were $17,462.2 million which shows that although increasing, the amount by which they

increased was smaller from 2015 to 2016. Between the years of 2014 and 2015 the total

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operating expenses increased by $2,176.6 million while between 2015 and 2016 the increase was

$1650.6 million. This trend would be consistent with a slowing in growths for the company as

not only were they not spending as much they were also not earning as much either. From their

different segments the Americas had higher operating expenses than all of the other segments

like China/Asia. In 2014 the American Operating expense was $9,171.5 million while in the

China/Asian Pacific segment it was $921.1 Million. In 2015 in the Americas it was $10,070.1

million compared to $2,015.0 million. This data is consistent with the facts that Starbucks began

in Seattle and expanded to other countries from there and that the U.S. has the most Starbucks

followed by Canada.

Figure 3 Starbucks by country 2014 qz.com

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The net earnings also follow the same trend. In 2014 the total net earnings attributable to

Starbucks was $2,068.1 million followed by $2,757.4 million in 2015 and $2,817.7 million in

2016. The differences were $689.3 million for 2015 and 2014 and $60.3 million for the years

2015 and 2016 which is a dramatic difference in growth.

Balance Sheet:

Since 2015, Starbucks cash and cash equivalents rose from $1,530.1 million to $2,128.8 in 2016,

a growth of $598.7 million. In 2014, the cash and cash equivalents were $1,708.4 million

suggesting that between 2014 and 2015 there was an increase in cash expenses. In 2015, there

were two major cash expenditures which could have affected the cash and cash equivalents for

the years. During that year, Starbucks spent $610.1 million on the repayments of long term debt

and $360.8 million on the cash used for purchase of non-controlling interest. Another factor that

affected the cash data was the fact that although net cash provided by operating activities was

much higher in 2015 and 2016 compared to 2014, the amount of cash used by investing activities

in 2015 was nearly twice the amount in 2014. Also in 2014 there was an accrued litigation

charge of $2,763.9 million due to a failed lawsuit between Starbucks and Krafts because of the

termination of a contract before the end date. 2014’s beginning of period cash was $2,575.7

million which gave a decent buffer to the $867.3 million decrease in cash. Although 2015 had a

smaller decrease in cash of $178.3 million, they started out with less, $1,708.4 million. In 2016,

Starbucks had lower outflow of cash for financing activities because they had larger proceeds

from issuance of long-term debt.

Since 2015, net accounts receivables increased by $49.8 million, from $719 million in 2015 to

$768.8 million in 2016. Inventories had a similar increase for those years of $72.1 million; rising

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from $1,306.4 in 2015 to $1,378.5 in 2016. Between these years Starbucks invested $445.5

million into property, plant, and equipment. They increased their fixed assets from $4,088.3

million in 2015 to $4,533.8 million in 2016. This would indicate that they expanded the number

of their stores and equipment by $455.5 million. Their short-term liabilities also increased during

this period. It went from $3,648.1 million in 2015 to $4,546.9 million in 2016. Their long-term

debt was $2,347.5 million in 2015 and $3,202.2 million in 2016 with other long term liabilities

of $600.9 million in 2015 and $689.7 million in 2016, the total long term liabilities were

$2,948.4 million in 2015 and $3,891.9 million in 2016 with a difference of $943.5 million

between the two years. The total equity is similar for the two years with very little relative

differences. The retained earnings decreased from 2015 to 2016 by $25 million. In 2015

Starbucks had the retained earnings of $5,974.8 million in 2015, while in 2016 they had $5,949.8

million. Another difference was the accumulated other comprehensive loss. In 2015 they had

$199.4 million while in 2016 it was $108.4 million. Their non-controlling interests were nearly

six times more in 2016 than in 2015, $6.7 million and $1.8 million respectively. These changes

contributed to the total equity cost being $5,819.8 million in 2015 and $5,890.7 million in 2016 a

mere difference of $70.9 million.

Ratio Analysis

Current ratio measures the ability of a firm to pay off its current liability by liquidating its

current assets. It indicates the firm’s ability to avoid insolvency in the short run. A current ratio

of more than one, in theory, is a good sign because it means that a company has enough assets to

meet liabilities. For 2015, Starbucks’ current ratio is 1.19 and Dunkin Donuts’ current ratio for

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2015 is 1.33. Having a low current ratio is not always bad though, just as a high current ratio is

not always good. Current ratio is based on the liquidation of all current assets to meet all current

liabilities, which isn’t likely to happen. It is still important to look at each asset individually and

understand how quickly each one can be converted to cash to meet current liabilities.

Average collection period is used to determine the average lag between the date of sale and the

date payment is received. For 2015, Starbucks’ average collection period is 12.86 days while

Dunkin’ Donuts’ average collection period for 2015 is 24.54 days. This shows us that on

average, Starbucks receives its payments about 48% faster than Dunkin’ Donuts. Average

collection period is important because it tells us the number of days’ worth of sales that is tied up

in accounts receivable. Having too much cash in accounts receivable can be a major liability.

The DuPont system is important because it breaks down ROE and helps us understand what

factors are affecting a firm’s return on equity. For 2015, Starbucks’ decomposition of ROE is

48% while Dunkin’ Donuts’ is -48%. Dunkin’ Donuts’ ROE is negative because their income for

2015 was negative. A safe ROE is around 10%, so with Starbucks at 48% it’s a good sign for

investors. A negative ROE is not necessarily a sign of a bad company to invest in though. Free

cash flow is another form of profitability that should be looked at.

Recommendation:

My recommendation is to buy/hold this stock because based on all of the ratios and information

collected on Starbucks it appears that this company is still growing and expanding its presence in

the global market. These past couple of years has had much change. There was Brexit and the

recent elections in the U.S. which could have skewed some of the information. However should

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the economy continue to improve in the U.S. then Starbucks stock price should continue to rise;

in which case it would be better to invest in its stock. If on the other hand the U.S. economy

should suffer, being a luxury good provider, Starbucks sales in the U.S. would decrease as well

and their foreign markets will not be able to balance out the loss. This stock has some risk to it

however, based on this data it would still be best to hold or buy the stock.

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References:Yanofsky, D. (2014). A cartographic guide to Starbucks’ global domination. Retrieved November 15, 2016, from http://qz.com/208457/a-cartographic-guide-to-starbucks-global-domination/

Starbucks Company Timeline. (n.d.). Retrieved November 15, 2016, from https://www.starbucks.com/about-us/company-information/starbucks-company-timeline

Who Is Starbucks' Target Audience? (n.d.). Retrieved November 16, 2016, from http://smallbusiness.chron.com/starbucks-target-audience-10553.html

SWOT Analysis Starbucks. (n.d.). Retrieved November 16, 2016, from http://www.valueline.com/Stocks/Highlights/SWOT_Analysis__Starbucks_Corp_.aspx#.WDf6PXkzXL8

Hawley, J. (2015). Who Are Starbucks' Main Competitors? (SBUX). Retrieved November 18, 2016, from http://www.investopedia.com/articles/markets/101315/who-are-starbucks-main-competitors.asp

Starbuck Corporation (SBUX). (n.d.). Retrieved November 18, 2016, from http://finance.yahoo.com/quote/SBUX/financials?p=SBUX

Jargon, J. (n.d.). Starbucks Fined $2.8 Billion in Grocery Dispute. Retrieved November 22, 2016, from http://www.wsj.com/articles/SB10001424052702303914304579194331955592154

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTExMjQyODQ1JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3#sA81B26E970E8EBC307543265204EBB47

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