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Starbucks Financial Analysis

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Starbucks Financial Analysis

Company Overview
Starbucks is the world’s largest specialty coffee retailer, Starbucks has more than 16,000 retail outlets in more than 35 countries. Starbucks owns more than 8,500 of its outlets, while licensees and franchisees operate more than 6,500 units worldwide, primarily in shopping centers and airports. The outlets offer coffee drinks and food items such as pastries and confections, as well as roasted beans, coffee accessories, teas and a line of compact discs. The company also owns the Seattle's Best Coffee and Torrefazione Italia coffee brands. In addition, Starbucks markets its coffee through grocery stores and licenses its brand for other food and beverage products. Starbucks Corporation was founded in 1985 and is based in Seattle, Washington. (Bramhall)
Company History
The story of Starbucks coffee history begins in Seattle in 1971 when the first Starbucks opened at Pike Place Market, which is Seattle's and the Nation's oldest Farmer's Market. At this time the company was a local coffee roasting facility. That remained their core business until 1982 when Howard Schulz joined the company. He was the new marketing executive and began right away to convince more and more local cafes, upscale restaurants, and hotels to buy Starbucks coffee. The turning point for the company and the beginning of coffee history should be one year later when Schulz traveled through Italy. He got inspired by the Italian coffee bar tradition to serve fresh brewed Espresso and Cappuccino. He convinced the Starbucks founders to give his idea a chance and in 1985 he opened the first coffee bar in Seattle, named Il Giornale. (Wilson)
The new concept worked out and Il Giornale was a success. But Schulz aimed higher. He found local investors and bought Starbucks in 1987 for $3.8 million. That gave way for expansion and in the same year he opened new cafes in Chicago and even Vancouver, Canada. The original 17 Starbucks Cafes were established. In 1992 the company went public and stocks were now publicly traded at the NASDAQ (SBUX). At this time Starbucks counts approx. 165 cafes. On March 7th, 2001 Starbucks eventually moved to Europe and opened their first cafe in the Old World: Zurich, Switzerland. Today the company has more than 16,000 cafes in more than 35 countries. (Wilson)

Main Products and Services
Starbucks Corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide. It offers brewed coffees, Italian-style espresso beverages, cold blended beverages, various complementary food items, coffee-related accessories and equipment, a selection of premium teas, and a line of compact discs, through its retail stores. Starbucks sells whole bean coffees through a specialty sales group and supermarkets. Additionally, Starbucks produces and sells bottled Frappuccino® coffee drink and a line of premium ice creams through its joint venture partnerships and offers a line of premium teas produced by its wholly owned subsidiary, Tazo Tea Company. These non-retail channels are collectively known as Specialty Operations. (Starbucks Annual Report)
Starbucks’ brand portfolio includes Starbucks Premium Coffee, Tazo teas, Starbucks Hear Music compact discs, Seattle's Best Coffee, and Torrefazione Italia coffee. The company teamed up with cooking.com to the Internet to offer people the option to purchase Starbucks coffee online. In 1998 Starbucks began distributing whole bean and ground coffee to supermarkets. (Starbucks Annual Report)
Recent Developments
In January of 2008, Howard Schultz returned as Chief Executive Officer and President of Starbucks. One of his first moves was to send a memo to the top executives of Starbucks that stated,” Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.” (Schultz) The memo continued to describe both what major mistakes they made and how to alleviate them.
Starbucks announced in the first week of July 2008 that it will be closing 600 “underperforming stores” and significantly scale back plans to open new outlets. The tough economy is hurting countless retailers and restaurants. But the prospect of Starbucks closing stores, rather than opening them, is different. According to Brad Stone of the New York Times, “The company has long been known in the world of commercial real estate for its expertise at selecting prime locations and its fearlessness in establishing almost comic ubiquity in some neighborhoods.” Stores are scheduled to be closed in 44 states plus the District of Columbia, with the largest number of closures in California, where 88 are slated to close; Florida, with 59; and Texas, with 57. (Reuters)

Financial Analysis
Sales and Income Record:

In Millions of U.S. Dollars 2003 2004 2005 2006 2007

Total Revenue 4,075.5 5,294.2 6,369.3 7,786.9 9,411.5

Percent change in Revenue 29.9% 20.3% 22.3% 20.9%

Net Income 265.4 388.9 494.4 564.3 672.6

Percent Change in Net Income 46.5% 27.1% 14.1% 19.2%

Starbucks has increased in both total revenue and net income by averages of over 20% each year in the past five years. There was a drop in increase of income in 2006.

Expense Distribution:
FY 2007
Cost of Revenue, Total 7,215.01
Selling/General/Admin. Expenses, Total 489.25
Depreciation/Amortization 467.16
Interest Expense(Income) - Net (108.01)
Other Operating Expenses, Total 294.14
Total Operating Expense 8,357.55
In Millions of U.S. Dollars (Reuters)

The cost of revenue, or goods sold, is 86.3% of the total expense distribution for Starbucks.

Assets and Capital Structure:

FY 2007
Assets:
Cash & Equivalents 281.26
Short Term Investments 157.43
Cash and Short Term Investments 438.69
Accounts Receivable - Trade, Net 287.93
Total Inventory 691.66
Prepaid Expenses 148.76
Other Current Assets, Total 129.45
Total Current Assets 1,696.49
Property/Plant/Equipment, Total - Net 2,890.43
Goodwill, Net 215.62
Intangibles, Net 42.04
Long Term Investments 279.87
Other Long Term Assets, Total 219.42
Total Assets 5,343.88

In Millions of U.S. Dollars (Reuters)

Total current assets make up 31.75% of total assets held by Starbucks Corporation. The Property/Plant/Equipment totals add up to be 54.1% of the assets owned by the company.

FY 2007
Liabilities
Accounts Payable 390.84
Accrued Expenses 664.29
Notes Payable/Short Term Debt 710.25
Current Port. of LT Debt/Capital Leases 0.78
Other Current liabilities, Total 389.42
Total Current Liabilities 2,155.57
Long Term Debt 550.12
Total Long Term Debt 550.12
Total Debt 1,261.14
Minority Interest 17.25
Other Liabilities, Total 336.82
Total Liabilities 3,059.76
Common Stock, Total 0.74
Additional Paid-In Capital 39.39
Retained Earnings (Accumulated Deficit) 2,189.37
Other Equity, Total 54.62
Total Equity 2,284.12
Total Liabilities & Shareholders' Equity 5,343.88
Total Common Shares Outstanding 738.29

In Millions of U.S. Dollars (Reuters)

Current liabilities make up 70.5% OF Total Liabilities for Starbucks. Total Liabilities are 57.3% of Total Liabilities & Shareholder’s Equity. Starbucks has never issues Preferred Stock.

Ratio Analysis,

(1) LIQUIDITY:
FY 2006 FY 2007
Current Ratio:

Starbucks .79 .76
Industry Avg 1.37 (Reuters)

Quick Ratio:

Starbucks .46 .47
Industry Avg 1.24 (Reuters)

Starbucks’ Current ratio is almost half of the industry average. This would suggest that they are not as solvent as the rest of the restaurant industry to obtain short-term capital. The Quick Ratio shows that Starbucks has a much lower ability than the industry average to convert assets to cash, if the need arises. (Warren)

(2) ASSET MANAGEMENT
FY 2006 FY 2007
Total Asset Turnover:

Starbucks 1.32 1.35
Industry Avg .19 (Reuters)

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue. Starbucks’ much higher number than Industry average indicates the company is efficient in how it utilizes its assets.

(3) DEBT MANAGEMENT:
FY 2006 FY 2007
Total Debt to Total Assets:

Starbucks .159 .236


A debt to asset ratio of no more than 50 percent has been considered prudent. A higher ratio indicates a possible overuse of leverage, and it may indicate potential problems meeting the debt payments. Starbucks is well below the 50 percent mark.

(4) PROFITABILITY:
FY 2005 FY 2006
Net profit Margin:

Starbucks .0725 .0715
Industry Avg 1.51 (Reuters)

Return on Assets:

Starbucks 1.94 1.94
Industry Avg 1.22 (Reuters)

Return on Equity:

Starbucks 28.62 27.24
Industry Avg 3.63 (Reuters)

Starbucks has less than half the industry average for profit margin. The return on assets are slightly higher than the industry Averages. The Return on Equity, a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested (Warren), is over 7 times higher than the industry averages.

CONCLUSIONS AND RECOMMENDATIONS
With the recent announcement that Starbucks is closing 600 retail operations in the next year, one might have some concerns about investing in the company. Starbucks’ ratio analysis shows mostly positive numbers, but the downscaling of the stores might be a sign of the future financial stability of the company. Most online financial analyst have recommended Starbucks as a hold or a buy stock. With Howard Schultz back in control of the company, one would hope that his vision of the future is a strong company moving forward. I would recommend buying Starbucks at the current discounted price and holding it in the portfolio for the future.
References
Bramhall, J., Web Site: http://hoovers.com
Reuters, http://www.reuters.com/finance/stocks/ratios?rpc=66&symbol=SBUX.O#profitability Schultz, Howard, Office Memo, February 14, 2008, http://onwardhoward.wordpress.com
Starbucks 2007 Annual Report, http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsAnnual
Stone, B.: The Wall Street Journal, Published: July 4, 2008
Warren, C. (2008) Survey of Accounting (4th ed.). Mason, OH: Cengage Leaning
Wilson, R., Ezine @rticles Web Site: http://ezinearticles.com/?Starbucks-Coffee-History&id=54143

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