STARBUCKS ANALYSIS 1
Anyinvestor interested in making an investment decision must considerthe financial implications. These form the basis on which suchdecisions are to be made. The investment decisions are known to relymassively on the economic performances of the respective analysis.Therefore, in this case, the financial statements and thecorresponding ratios are keenly analyzed. The trend of return is alsotaken into consideration by those focused on providing their fundsfor investment purposes. This paper will analyze the financialposition of Starbucks by evaluating the financial data for the lastthree years. Additionally, the study investigates both the horizontaland vertical analysis of the corporation and also conducts acomparison analysis of the company’s financial ratios. Finally,based on the analysis that has been performed, it will be possible todetermine whether one should consider making an investment intoStarbucks.
StarbucksCorporation is one of the global leaders in the beverages industry.The company has majored in the delivery of innovative coffee productsto its customer base as a means of improving its global presence. Asa market leader, it is emulated by other competitors. The globalcoffee retailer has more than 16,000 retail outlets and operates inmore than 35 countries across various continents. The company,however, owns 8500 outlets while it has licensed other businessorganizations to provide its products mostly in shopping malls andshopping centers. Some of the products offered in these stressinclude pastries and confections. Others include roasted beans, teas,coffee accessories and line of compact disks. In addition toproviding coffee to its customer base, the company also owns otherthe Seattle`s Best Coffee and Torrefazione Italia coffee brands.
Followingthe economic depression witnessed in 2008, the company recalled itsformer CEO to oversee the period of economic turmoil and spur growth.Howard Schultz returned as the CEO and president of Starbucks. Hisreturn to the helm is remembered for the first memo that he sent tothe department heads regarding the customer experience at the retailstores. He clearly stated that in the course of expansion, thecompany had compromised on its quality and customer experience andfocused more on the commoditization of the company’s brand. Heidentified the major mistakes and how the company was going to moveforward. This brought about a series of changes to the operations ofthe business organization as most of its operations were now tailoredto meet the needs of the customers.
Theentry of Howard Schultz in his second stint to the company in 2008saw more emphasis being laid on the need to maintain the company’suncompromising principles in its quest for further growth. Thecompany’s board of directors developed a series of governanceprinciples, policies, and charters that would form the basis ofStarbucks operations and management practices. The company has 12directors who meet the requirements that have been set by NASDAQ aswell as the United States Securities and Exchange Commission.
Thecompany has been established in a way that it adheres to all thelabor laws and acts. As such, the production process is legal and intotal adherence to the United States labor laws, Canadian Code, andthose that are contained in the United Nations conventions. Thecorporation also practices ethical practices by restricting the useof child labor and other harmful working environment. Compliance withthe international labor organization (ILO) has been given increasedimportance. Starbucks also regulates workplace safety with theoversea suppliers as well as those based in North America. To achievethis, they offer safety training in the production process.Additionally, Starbucks follow the Coffee and Farmer EquityPractices. This regulation states that no one below 14 years shouldbe hired by the corporation. Moreover, all employees should beoffered payment packages that meet the minimum wage rate. The companyalso received praise for its scores in the evaluation of workplacesafety against chemicals for producers.
Themanagement of Starbucks has established clear goals as well asperformance objectives that guide the employees. Furthermore, theresponsibilities of the directors are realistic and strategic therebyensuring that they can meet the targets set by the businessorganization. The board holds quarterly meetings whereby companyearnings and results are analyzed. The board is also tasked withmonitoring the corporate performance and integrity. This includesfactors relating to compensation decisions.
Horizontaland Vertical Trend analysis
Thehorizontal analysis focuses on the trends and changes that might beexperienced in the financial statements over a given period.Therefore, the horizontal analysis can be used to identify trends andestablish ways to which relative changes are occurring in thefinancial status of an organization. Moreover, the horizontalanalysis provides an opportunity for the comparison of ratiosobtained from the financial information.
The vertical analysis, otherwise known as common size analysisprovides an opportunity for one to see the components of each of thefinancial statements. This form of analysis also establishes whethersubstantial changes have occurred. It is accomplished by setting thetotal assets amount to 100%. At times, the value that is to be usedincludes total liabilities plus shareholders equity. After that, theother accounts are converted as a percentage of the total assets.
Industryand competitor ratios
Thebeverage industry is one of the most competitive and as such thefinancial ratios play an integral role in establishing theperformance index over a period. The participants in this industry,therefore, lay massive emphasis on the nature of ratios obtained andways through which the necessary changes can be made to ensure theprofitability of the corporations.
Variousforms of rates are taken into consideration when dealing withStarbucks and other companies operating within the same industry.These ratios are categorized into profitability ratios, liquidityratios, cash flow ratios and efficiency ratios. Such ratios are usedto highlight the nature of performances within the highly volatilebusiness environment.
Theseare ratios used to establish the nature of returns that one businessorganization provides to the investors. These rates depend on themargin of sales. For Starbucks corporation, the tax rate for 2014 and2015 was 34.56% and 29.30% respectively. Additionally, the net marginfor the two years was determined to have been 12.57% and 14.39%. Theasset turnover is also a ratio used to determine the level ofprofitability of a business organization. Based on a comparisonanalysis with the financial results obtained in 2009, the assetturnover for 2014 and 2015 was 1.48 and 1.65 respectively.
Returnon assets is an economic indicator that shows the profitability ofthe property at the disposal of a business enterprise. Starbuckscorporations had a return on assets ratio of 18.57 and 23.77. Thedifference indicated a substantial difference in the performance ofthe company’s assets. In this regard, the financial leverage of thecompany stood at 2.04 and 2.14. On the other hand, return on equityrefers to the capital gained from trading with the shareholders’contributions. Starbucks posted 42.41 and 49.73 for the 2014 and 2015financial periods. The returns on invested capital were 30.79 and35.86 respectively for that period. These financial ratios indicatedthat the company’s profitability had marginally improved betweenthe two financial years.
Thegrowth ratios, on the other hand, indicated any forms of increasesrelating to the inflow of capital. These ratios include the revenue,operating income, net income, and the earnings per share. The yearover year revenue for Starbucks company for 2014 and 2015 are 10.45and 16.51. On the other hand, the year over year operating income for2015 was 16.87. On the contrary, there were no ratios for theprevious financial period. The same trend has been witnessed for theyear over year net income for 2015 which posted an impressive resultof 33.33. However, the 2014 financial period did not spot any yearover year net income. The earnings per share show the dividend earnedby shareholders on their shares. In this regard, 2014 did not postany form of EPS whereas, in the subsequent year, the year over yearEPS ratio was 34.32.
Thecash flow ratios indicate the nature of the financial position of afirm concerning the cash flows. Some of the liquidity ratios includeoperating cash flow, free cash flow, Cap Ex, Free Cash Flow overSales and Free Cash Flow over Net Income. For the 2014 period, thecash flow ratios were determined as follows the operating cash flowgrowth percentage for the year over year was -79.10, Cap Ex was 7.06,Free Cash Flow over Sales was -3.36 and Free Cash Flow over Incomewere -0.27. On the other hand, the values for 2015 were 516.83, 6.80,12.76, and 0.89 respectively.
Theseare ratios that indicate the financial health of a businessorganization. They include current ratio, quick ratio, financialleverage, and debt/equity ratios. The current ratios indicate thedifference between current assets and current liabilities. In thiscase, the ratio stood at 1.37 and 1.19 for 2014 and 2015respectively. The quick ratio, on the other hand, was 0.81 and 0.64for 2014 and 2015 respectively. The financial leverage ratios for thesame period stood at 2.04 and 2.14 respectively. Finally, the debtequity ratio for 2014 was 0.39 whereas as that for 2015 was 0.40.
Theseare ratios that indicate how efficient the operations of the businessorganization are. Some of the ratios in this category include DaysSales Outstanding, Days Inventory, Payables Period, and CashConversion Cycle. Other ratios include Receivables Turnover,Inventory Turnover, Fixed Asset Turnover, and Asset Turnover. Theratios for 2014 were 13.23, 58.59, 27.28, 44.54, 27.59, 6.23, 4.90,and 1.48 respectively. On the other hand, the financial ratios forDays Sales Outstanding, Days Inventory, Payables Period, CashConversion Cycle, Receivables Turnover, Inventory Turnover, FixedAsset Turnover, and Asset Turnover were 12.86, 56.18, 28.54, 40.50,28.39, 6.50, 5.04, and 1.65 respectively.
BuildForecast for the next FYand analyze the same. What is their CAGR? IsAFN needed?
Thefinancial ratios can be used to make forecasts on the performance ofa business organization. The trend that has been established overtime provides a rough estimate of how future events are likely tounfold. In this case, investors and other financial experts are in aposition the expected outcomes of investments.
Forthe fiscal year 2014, the corporation expected revenue growth to bedriven by mid-single-digit sales growth across the globe.Additionally, there were 1,500 new store openings. This, inconjunction with the continued growth in the Channel Developmentbusiness, were also taken into consideration. The company expectedthe fiscal year 2016 consolidated operating margin to experienceimprovement in comparison to the fiscal 2015 operating results.However, these would exclude the litigation charge associated withthe Kraft arbitration, of 150 to 200 basis points and strong EPSgrowth and would be primarily driven by leverage on revenue growth.
Theeffective tax rate was estimated to be approximately 34.5% for 2016.On the other hand, the capital expenditures in fiscal 2016 areestimated to approximate $1.2 billion. The figure will be determinedby store renovations and new stores in addition to other investmentsthat will be tailored to offer support to the ongoing growthinitiatives.
CompoundAnnual Growth Rate (CAGR)
Thecompound annual growth rate can be described as the average rate ofgrowth of investment. The rate is usually established over a givenperiod which lasts more than one year. To determine the compoundannual growth rate, one has to divide the value of investment at theend of a financial period under consideration and divide that valueby the initial value that was invested in the initial stages of theinvestment. The result obtained is then raised to the power one overthe period length. One is then deducted from the subsequent result.The value obtained is not regarded as a rate of return but as arepresentational figure.
AdditionalFunds Needed (AFN)
Thisis the means of determining the level of funding that will berequired. It helps the business organizations to establish whetherthere will be additional demand for the resources and if the firm canbe in a position to raise the additional funds that are required forthe completion of the task at hand. Another factor that is determinedin this case relates to whether the corporation is in a position togenerate additional funding by achieving higher sales levels. One ofthe assumptions of this method is that it assumes that there arechanges to the financial ratios. In case there is an increase in thevolume of sales, the corporations will change by allowing asubstantial increase in its assets in the form of plant andequipment, property, and accounts receivables. The formula can beestablished as follows:
Additional Funds Needed = Ao ×
− Lo ×
× S1 × PM × b
Where,Ao =current level of assetsΔS/So = percentageincrease in sales i.e. change in sales divided by current salesLo =current level of liabilitiesS1 = new level ofsalesPM = profit margin, then b = retention rate = 1 –payout rate
Incase the value obtained is a negative, it will indicate the existenceof a surplus of capitak with regard to additional funds needed.
Ratioscompared to the industry and competition
Dividendpolicy (Payout ratios, trending of payouts etc.)
Thecompany is registered with the United States Security ExchangeCommission. Starbucks common stock is therefore traded on NASDAQ. Thesymbol SBUX is used to represent the common stock of StarbucksCorporation. The table below shows the quarterly high and low saleprices per share of Starbucks common stock as reported by NASDAQ foreach quarter during the last two fiscal years and the quarterly cashdividend declared per share of our common stock during the periodsindicated:
Accordingto the books of the company, there were approximately 18470shareholders as of November 8, 2013. However, the number did notinclude individuals whose stock was on a nominee or a street nameaccounts. The payment of cash dividends to the company’sshareholders is at the discretion of the board of directors. Thedecision will depend on the operating performances, capitalexpenditure requirements, and financial condition in addition toother factors that the board may consider to be relevant.
Thecompany’s primary market risk is associated with the commodityprice risks. This is attributed to the corporation’s purchase ofthe green coffee and other dairy products. Therefore, theavailability of such products will have a direct effect on theresults of operations that will be posted by Starbucks. The purchaseof the inputs is, therefore, one of the primary reasons for theexistence of commodity price risk. Other forms of risk that affectthe corporation include foreign currency exchange risk. This isbecause most of the capital purchasing activities are conducted in USdollars. However, with a portion of the company’s operations beingperformed outside the US, the corporation has to use other forms ofcapital such as the Canadian Dollar, Japanese Yen, Euro, BritishPounds, Chinese renminbi.
EquityService Price Risk is caused by the existence of minimal exposure toprice fluctuations on equity mutual funds with the company’strading portfolio. Additionally, the interest rate risk regardingdebt securities and the available-for-sale securities are some of therisk factors that face the operations of Starbucks Corporation.
Thecapital structure of a business organization refers to thecomposition of the financial structure of a business organization.For Starbucks Corporation, various ratios indicate the capitalstructure. Total Debt to Total Equity is 40.35, Total Debt to TotalCapital is 28.75, Total Debt to Total Asset is 18.86, Long Term Debtto Equity is 40.35, and Long-Term Debt to Total Capital is 28.75.
Recommendationon whether to invest in the company.
Based on the information available regarding he financial performanceof Starbucks, it is evident that the business organization is in ahealthy financial situation. The greater financial muscle can beattributed to the sound financial management technique that themanagement is utilizing as a means through which to remain theprimary market leader in the coffee industry. for an investor, thecommon stock of the company provides a viable investment opportunitysince the earnings per share is constant over a given duration. Thisprovides the investors with a level of continuity.