2. Analysis Of Starbucks
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Table of Contents
Company Profile:................................................................................................................................3
Financial Analysis:...........................................................................................................................6
Income Statement.......................................................................................................................6
Balance Sheet:............................................................................................................................8
Ratio Analysis..............................................................................................................................9
Recommendation:............................................................................................................................10
References:......................................................................................................................................12
3. Analysis Of Starbucks
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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:
IncomeStatement
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
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increased was smaller from 2015 to 2016. Between the years of 2014 and 2015 the total
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.
BalanceSheet:
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.
12. Analysis Of Starbucks
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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#.WDf6P
XkzXL8
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-
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