business executives
Starbucks Corporation
Financial Analysis and Planning Report
By Shelly Orjuelo
July 24, 2006
Dr. Yvan Nezerwe
Seminar in Finance
FIN 700
TABLE OF CONTENTS
Section I (a)
Industry Summary Profile…………………………………………………
Section I (b)
Future Investments…………………………………………………………
Financials
Shareholders Value
Section II
Implementation…………………………………………………………………….
Asset Allocation……………………………………………………………
Security Analysis…………………………………………………………..
Portfolio Diversification
Section III
Strategy…………………………………………………………………….
Financial Ratios……………………………………………………………
Debt/Equity
Debt/Capital
Operating Margin
Net Margin
Return on Equity
Income Statement
Section IV
Critical factors and Measures………………………………………………………
Future competition strategy- Next Three years
Section V
- Risk Management Tools
- External Factor Evaluation Method
- Analytical tools
- Corporate Management Tools
- SWOT Analysis
- Portfolio Management Tools
- WACC
References…………………………………………………………….……………
STARBUCKS CORPORATION
Section I (a)
Industry Summary
Starbucks Corporation, founded in Seattle, Washington is a global leader in specialty coffee consumption. It roasts, retails and markets specialty coffee. The firm offers a broadvariety of blends of coffee, handcrafted beverages, merchandise, and food items. It also offers a range of consumer products in coffee and tea, readymade drinks, and ice cream.The company today delivers quality premium coffee with a higher level of customer service and at a premium price, around the globe. Starbucks has achieved by its owned and through licensed stores, to make presence in Asia-Pacific, Africa, Europe and the Americas. Starbucks can be used as amodel of a company that has successfully and positively embraced a differentiation focus strategy providing top quality, focused product, of which, for the company consumers, price is in essence. Its mission is “to inspire and nurture the human spirit—one person, one cup and one neighborhood at a time.”¹
Section I (b)
Future Investments
The market economy volatility has brought up a great opportunity for investors to snap up long-term investments for bargain inexpensive prices. Starbucks stock is one of a kind of investment that an investor would like to hold on to for several reasons.
- Expansion into China and other International Market’s
The company after performing heavy R&D in Asia, believes the Chinese market can overtake the U.S as the firms largest. However, since the market is so unpredictable, China’s current economy has been down for the past quarters since 2015 and sales have been flat. Yet, CEO Howard Shultz points positive sign for future growth.
- Strategic Acquisition
Not too long ago, the company acquired 60.5% share in Starbucks Coffee Japan, Ltd., a joint venture through the acquisition between Japan “sazaby league” and Starbucks; the company increased its revenue by $1.1 billion a year later after the acquisition. Japan is the company’s second largest market in terms of retail sales.
In 2015, the company entered into partnership with a premium German retailer and licensed partnership with Taste Holdings, a licensor of global brands in the Southern African regions. And finaly Under the terms of agreement Tingyi would manufacture and expand the distribution of Starbucks read-to-drink (RTD) products throughout mainland China.
- Technology and Mobile Leader A+
This day’s most of the business transactions are done online and many of this transaction are done through mobile applications. Starbucks has developed a successful mobile reward program where customers can pay ahead through the phone and don’t need to wait on line. The coffee chain has a good quarter with revenue jumping 12% to a record $5.4 billion
The company intends to add 1,800 more locations in FY 2016, representing an 8% increase over prior years. Half of those locations will be in the China/Asia Pacific region, while 39% of those locations will open in the Americas.For the beginning of Q1 FY16, Starbucks open the quarter with net revenues of $5.4billion, 12% more than in Q1 FY15. Company management expects 12% YoY growth in FY 2016 revenue. Of course, one huge potential downfall to these lofty predictions lies in the outcome of the Chinese economy. Starbucks’ stock price could fall sharply if growth in the Chinese GDP falls more than expected. Starbucks also expects GAAP EPS in the range of $1.84 to $1.86 per share.
Starbucks has roughly 23,000 restaurants, nearly half of which are franchisees, and we expect this number to go up to nearly 32,000 by the end of our forecast period. Revenues are higher from company owned stores and we expect EBITDA margin of these stores to remain stable over the forecast period, in our base case scenario. For franchised stores, we expect a similar trend. We expect Starbucks to expand via both company operated and franchised stores. Most of this expansion is likely to come from Asia Pacific – the company expects to double its store count in this region to 10,000 by 2019.Over the next three years, Starbucks will continue surprising its customers by innovating in different ways its coffee, tea and retail, satisfying consumer expectations, extending leadership in mobile and digital technologies and opening to new markets around the world.
Operations are conducted with more than 150,000 employees around the world, facing not only a surplus, but also some complications in its running during the economic crisis, however; still the company has been able to maintain growing and continues as market leader with implementation of future strategies.
Financials
The company has strong fundamentals. More than 70% of listed companies have a lower mix of growth, profitability, debt and visibility criteria
Good news for investors! Margins returned are among the top rank on the stock exchange list. Everything points out big profits
Starbucks Asset turnover for Q1-2016 was 41.54% It is also linked to Return on Assets (ROA) through Du Pont Formula. Starbucks Corp’s annualized Return on Assets (ROA) for the quarter that ended in March 2016 was 18.07%
Based on the tables below, we can conclude the following:
- The company is in a robust financial situation considering its net cash and margin position.
- Predictions on business development from analysts polled by Thomson-Reuters are tight. This results from either a good visibility into core activities or accurate earnings releases.
- Historically, the company has been releasing figures that are above expectations.
- Analysts have a positive opinion on this stock. Average consensus recommends overweighting or purchasing the stock.
- The average target price set by analysts covering the stock is above current prices and offers a tremendous appreciation potential
Annual Income Statement past three years and future projections for the next three years
Priors Current and Estimates Annual Income Statement
Prior, current and projections of Leverage yearly until 2018
Shareholders Value
$19.2 Billion Net Revenue
$3.6 Billion Record Profit
54+% stock Price Growth FY-15
$88 Billion + market cap (current)
According to the latest “Complete Recap of Starbucks 2016 Annual Meeting of Shareholders” Howard Schultz Chairman and CEO of Starbucks believes China will be as large or larger than the U.S. business in the long run.
Section II
Asset Allocation
For investors and shareholders, Starbucks have a diversified portfolio with asset allocation on cash, inventory, bonds, 401k and much more. Its Account receivable is high and frequently indication that cash flow is fluent. Starbucks is showing desirable trends with positive ratios in asset turnover, AR, working CAP turnover and P/E ratio
Security Analysis
Starbucks +.52% delivered 8% same-store sales growth globally and 9% same-store sales growth in the Americas. Earnings per share, at $.46, were a bit above the FactSet consensus of 45 cents.
Yet, the company expected on its Q2-2016 adjusted earnings of $.38 to $.39 p/share against a FactSet consensus of $.39.
For overseas countries, foreign exchange is now expected to impact revenue by 200 basis points and earnings per share growth by 300 basis points.
Portfolio Diversifications
Why diversification is so important? Well, we all know the famous phrase “Don’t put all of your eggs in one basket,” if we visualize that saying, then we understand the idea of diversification and why it is so important for protecting our assets. Diversification is simply the “act of introducing variety.”
For future investors and shareholders, Starbucks understands the main core of business. Therefore, the company made sure all its assets and values were not only on coffee beans but instead diversified its products into fast food and retail businesses.
Starbucks is a company that thinks globally rather than locally. Reason being, Starbucks continues Pioneering foreign market and introducing its name into different cultures.
More than coffee beans, Starbucks also offer:
- Cold beverages
- Teas, Frappuccino’s, Ice Late,
- Fast food
- Bakery products
- All day Breakfast
- Snacks
- Retail Merchandise
- Cups, mugs, teddy bears
- Note pads, booklets, Pens
- Technology
- Pay by mobile app
- Reward cards (every point is a $)
Section III
Strategy
Starbucks counts with a strong balance sheet and a solid cash flow statement that can help the company continue doing business in a kosher way and keep the same pattern of business expanding in different markets and foreign countries.
One of Starbucks strategy that is already in place and is bring revenue to the company and convenience to the customer, is the easy payment via the mobile app. 24% of US orders were paid via Starbucks’ mobile app in Q1-16, compared to Q4-15 21% In order to boost the mobile purchase in 2016 and upcoming years, The company is planning add personalization features and other incentives.
Starbucks is entering into markets that in the past had hard shells and were impenetrable. These are China and India. Their culture and mentality did not allow the coffee company to invest R&D. However, now the Chinese middle class income population is looking for changes and new concepts. In addition, India being a major consumer country in Tea, is opening doors to Starbucks and welcoming profits to our shareholders and future investors.
Financial Ratios
The purpose of showing the financial rations in this analysis report, is to help shareholders and futures investors to see and understand the internal strengths and weakness of the company and can affect among the competition.
Based on the financial data obtained from, www.stock-analysis-on.net/NASDAQ. I was able to calculate the Debt to Equity and Debt to Capital ratio for current and past years.
Starbucks Corp, debt to Capital and Debt to Equity improved from year 2014 to first quarter of Year 2016. Also, we can see that Q1-2015 was not a good year since Q1-2014 had a better ratio and so did Q1-2016 for Capital and Equity.
| Starbucks Corp., Debt to Capital (Yearly Data) | |||
| Mar 27, 2016 | Mar 29, 2015 | Mar 30, 2014 | |
| Selected Financial Data (USD $ in thousands) | |||
| Short-term debt | 149,100 | – | – |
| Current portion of long-term debt | 399,800 | – | – |
| Long-term debt, excluding current portion | 2,447,600 | 2,048,500 | 2,048,000 |
| Total debt | 2,996,500 | 2,048,500 | 2,048,000 |
| Shareholders’ equity | 5,094,600 | 6,008,700 | 4,945,100 |
| Total capital | 8,091,100 | 8,057,200 | 6,993,100 |
| Debt to capital | 0.37 | 0.25 | 0.29 |
| Debt to capital = Total Debt / Total Capital | |||
| Starbucks Corp., Debt to Equity (Yearly Data) | |||
| Mar 27, 2016 | Mar 29, 2015 | Mar 30, 2014 | |
| Selected Financial Data (USD $ in thousands) | |||
| Short-term debt | 149,100 | – | – |
| Current portion of long-term debt | 399,800 | – | – |
| Long-term debt, excluding current portion | 2,447,600 | 2,048,500 | 2,048,000 |
| Total debt | 2,996,500 | 2,048,500 | 2,048,000 |
| Shareholders’ equity | 5,094,600 | 6,008,700 | 4,945,100 |
| Debt to equity | 0.59 | 0.34 | 0.41 |
| Debt to Equity = Total Debt / Shareholders Equity |
For the 26 weeks ended 27 March 2016, Starbucks Corporation revenues increased 11% to $10.37B. Net income decreased 15% to $1.26B. Revenues reflect United States segment increase from $3.13B to $7.18B, China & Asia Specific segment increase from $595.2M to $1.33B, Comp. Store Sales (Growth-%) -US increase of 33% to 8%, Retail Sales-America (Owned) increase of 10% to $6.43B.
| Starbucks Corp., Consolidated Income Statement (Yearly Data) | ||||||
| USD $ in thousands | ||||||
| 27-Mar-16 | 29-Mar-15 | 30-Mar-14 | ||||
| Company-operated stores | 3,944,200 | 3,622,900 | 3,068,000 | |||
| Licensed stores | 493,100 | 421,300 | 356,200 | |||
| CPG, foodservice and other | 555,900 | 519,300 | 449,600 | |||
| Net revenues | 4,993,200 | 4,563,500 | 3,873,800 | |||
| Cost of sales including occupancy costs | -2,010,300 | -1,859,800 | -1,629,200 | |||
| Gross profit | 2,982,900 | 2,703,700 | 2,244,600 | |||
| Store operating expenses | -1,466,400 | -1,324,600 | -1,134,500 | |||
| Other operating expenses | -139,600 | -133,500 | -110,900 | |||
| Depreciation and amortization expenses | -247,800 | -217,100 | -174,400 | |||
| General and administrative expenses | -330,500 | -305,900 | -240,600 | |||
| Litigation (charge) credit | – | – | – | |||
| Restructuring charges | – | – | – | |||
| Gain on sale of properties | – | – | – | |||
| Income from equity investees | 65,600 | 54,900 | 59,900 | |||
| Operating income (loss) | 864,200 | 777,500 | 644,100 | |||
| Gain resulting from acquisition of joint venture | – | – | – | |||
| Loss on extinguishment of debt | – | – | – | |||
| Interest income and other, net | 14,500 | 1,300 | 17,800 | |||
| Interest expense | -18,300 | -16,900 | -16,700 | |||
| Earnings (loss) before income taxes | 860,400 | 761,900 | 645,200 | |||
| Income tax (expense) benefit | -285,400 | -266,300 | -218,300 | |||
| Net earnings including non-controlling interests | 575,000 | 495,600 | 426,900 | |||
| Net (earnings) loss attributable to non-controlling interests | 100 | -700 | 100 | |||
| Net earnings attributable to Starbucks | 575,100 | 494,900 | 427,000 | |||
| Starbucks Corp., Profitability Ratio | ||||||
| Return on Sales | 27-Mar-16 | 29-Mar-15 | ||||
| Gross profit Margin | 59.66% | 58.84% | ||||
| Operating Profit Margin | 19.00% | 18.74% | ||||
| Net Profit Margin | 12.61% | 14.57% | ||||
| Return on Investment | 27-Mar-16 | 29-Mar-15 | ||||
| Return of equity (ROE) | 49.90% | 42.91% | ||||
| Return on Assets (ROA) | 20.31% | 21.15% | ||||
The profitability ratio form Return on sales from Q1-2016 compared to Q1-2015 was a slight increase and Net profit Margin decreased from Q1-2015 to Q1-2016 by almost 2%. In addition, Starbucks ROE were better in Q1-2016 than ROA on Q-2015.
Section IV
Strategic points in the Market
Another gap that Starbucks could identify and approach would be; developing a promotional program that accessed how many cups of specialty (high priced) coffee they sell in the U.S. monthly and donating a percentage of the profits in the form coffee to less privileged foreign countries. taking on a more financially conscious approach that would improve their rewards system and produce some sort of base level standard coffee that they can sell through their stores all over the world at a low price.
Strategic Objectives
- Company need to focus in maintaining its leadership in customer service, and client satisfactions.
- Working on face to face customers to understand more about their needs and what improvements the company might need to go through.
- Thinking more environmental and making donations based on purchases. For instance, donate $.10 per cup of coffee to the environment or a good cause
- Coffee is known to keep you awake, and most of the employees are young. Therefore, specific scholarship should be part of a strategy for Starbucks to lower its taxes
Section V
Risk Management Tools
The tool below, allows investors and shareholders to have a better understanding of how the market economy is doing. It evaluates environmental, political social, economic, technological and legal information about the firm.
Corporate Management Tools (SWOT)
Strengths
The firm is considered to be a competitive dominant force in the coffee industry and has maintained as the leader from inception. Some of the strengths are attributed to the brand recognition, customer service, product, financial profitability and international constant expansion. This is something investors look into when acquiring stocks from the company.
Weakness
Eventhough, the coffee sales at premium price, is still considered more than average for a cup of coffee. With its high price, Starbucks is targeting certain niches around the globe and this excludes thelower class income. Averse investors might feel uncomfortable when there is risk involved and can obtain the same return with lower risk from Starbucks competitors.
Portfolio Management Tool
WAAC
As of today, Starbucks Corp’s weighted average cost of capital is 7%. Starbucks Corp’s return on invested capital is 42.16 Starbucks Corp generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.
To raise capital money is needed. Therefore, a firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows
WAAC
Notes
Overall, Starbucks company has shown from inceptions that is a firm capable of confronting all kind of markets and even though the economy, had crash, the markets have gone crazy, Starbucks has been able to maintain at its same level with premium coffee and quality customer service.
Proof of its positive feedback from every quarterly earnings release, is that Starbucks continue seeking growth overseas and even in rural areas where middle class income people are willing to pay $4.60 for a cup of coffee. Starbucks is a stock that must be in your portfolio!
Even though, the cash flow from operations is .07 more than net income is still continue a Stock to buy because and not to sell.
Has a health average operating margin of 19% over the last year.
Net margins are healthy with an average of 12.6% for the past year
ROE is at 44.2%
And the company has a healthy cash flow margin of 4.3%
REFERENCES
Alderman, Liz. “Starbucks on the Seine.” The New York Times. The New York Times, 31 Mar. 2012. Web. 05 Mar. 2013. .
Brydon, J. (2011). Starbucks an industry and company analysis. Unpublished raw data, ,
Available from scribd.com. (55421271).
Liu, L. (2009, September 28). Cafés Compete With Starbucks in Europe – ABC News. ABCNews.
com: Breaking News, Politics, World News, Good Morning America,
Exclusive Interviews – ABC News. Retrieved January 31, 2011, from http://abcnews.go.com/Travel/mccafs-compete-starbuckseurope/story?id=8690156
International Coffee Organization Prices. (2010, December). International Coffee
Organization – News from the ICO. Retrieved January 29, 2011, from http://www.ico.org/prices/p2.htm
Forbes, Can Teavana Drive Revenue Growth For Starbucks in China? March 28, 2016
Starbucks Investor Relations, Financial Release Q2-2016
Starbucks Shared Planet – Our Responsibility. (2009). Retrieved November 24, 2009,
from http://www.starbucks.com/sharedplanet/ourResponsibilityInternal.aspx? Story mission Statement
Thompson, A. A., Strickland, A. J., & Gamble, J. (2007). Crafting and Executing Strategy:
Text and Readings. Boston, MA: McGraw-Hill/Irwin.
"Looking for a Similar Assignment? Order now and Get 10% Discount! Use Code "Newclient"
