Starbucks Financial Analysis
Starbucks is a strong competitor in the service sector and a leader in the gourmet coffee industry. With a continued growth rate in store openings and maintaining successful profitability of its operations, Starbucks has demonstrated its ability to sustain a reliable and steady growth. Starbucks’ ability to contend with the vulnerability to current financial threats such as economic recession, higher interest rates, and global competition, is constantly proven by its incomparable brand image, its continual product innovations, and its exceptional customer service.
This also proves to be its strongest investment strategy.
One strategic way to evaluate the vulnerability of Starbucks to current financial threats is to execute a SWOT Analysis. A SWOT analysis is a situation analysis in which the strengths and weaknesses of an organization, and external opportunities and threats it faces are examined to chart a strategy (Business Dictionary, 2012).
SWOT is the acronym for strengths, weaknesses, opportunities, and threats. The purpose of the SWOT analysis is to assess what an organization can and cannot do in addition to evaluating the potential opportunities and any financial and economical threats it may face.
Over the years, Starbucks have developed much successful strengths. Here are a few of the most recognizable strengths: The quality of their coffee is considered the highest in the world. They engage with customers and the communities to provide better business.
Starbucks has over 17,000 stores globally in convenient locations to attract more customers. Starbucks have expanded their product line to sandwiches, pastries, and natural tea-blend drinks. Starbucks have loyal employees who are valued, motivated, and hard-working and are provided a pleasant working environment.
They have exceptional relationships with all suppliers which helps them exceed as industry market leaders. Over the past several years, Starbucks has received several award and recognitions such as “No. 1 Best Coffee” and “No. 1 Most Popular Quick Refreshment Chain” by Zagat’s Survey of National Chain Restaurants, one of “The Best 100 Companies to Work For” by Fortune Magazine, one of the “World’s Most Ethical Compamies” by Ethisphere, and one of the “World’s 50 most Innovative Companies” by Fast Company. With all companies, where there are strengths there are weaknesses.
Starbucks have noted and viable strengths, but they have weaknesses that could overshadow the success of these strengths placing them a step or two behind their competitors. Here are some of their weaknesses: The size of the company is larger than most of their competitors, lack of internal focus because much focus is on expansion and not on the diversification of other sectors, product pricing is overstated because of their premium brand coffee, which demands premium pricing, and excessive dependency on coffee-alone products.
Starbucks have willed many opportunities to become the most valuable gourmet coffee leader in the world. They have already succeeded in expanding their product line by introducing the world to cold coffee beverages, flavored herbal drinks, and hot sandwiches and salads for lunch.
So, now they have the opportunity to continue to expand in their development overseas, continue their innovation and commitment to product development, and possibly co-brand with other manufacturers of food and drinks to help expand their product line.
The competition in gourmet coffee in general has proved to be more advanced than one would imagine. So, it’s no surprise that the competition would be one the most highly doable threats. With coffee sellers ranging from coffee houses to restaurants and fast-food carry-outs such as McDonald’s, Starbucks has to contend with ensuring that they maintain their perfection in coffee and customer service to avoid such threats. Another major threat is the economy. The state of the economy today, particularly in the future depends especially on consumer spending.
This would play a key role in Starbucks’ sales growth and profits. Factors such as increased debt service levels resulting from interest rate changes, downturn in the housing market, and the increase in oil and gas prices would affect optional spending.
Now that the assessment of the SWOT analysis has been completed, it’s time to determine the financial performance of Starbucks over the past three years and predict how it will perform in the future by using financial ratio analysis. This will be determined by examining the Income Statement and Balance Sheet as of FY 2011.
Consolidated Statements Of Earnings (USD $)12 Months Ended
In Millions, except Per Share data Oct. 02, 2011 Oct. 03, 2010 Sep. 27, 2009 Net revenues:
Company-operated stores $ 9,632.4 $ 8,963.5 $ 8,180.1
Licensed stores 1,007.50875.2795
CPG, foodservice and other 1,060.50868.7799.5
Total net revenues 11,700.4010,707.409,774.60
Cost of sales including occupancy costs 4,949.304,458.604,324.90
Store operating expenses 3,665.103,551.403,425.10
Other operating expenses 402293.2264.4
Depreciation and amortization expenses 523.3510.4534.7
General and administrative expenses 636.1569.5453
Restructuring charges 053332.4
Total operating expenses 10,175.809,436.109,334.50
Gain on sale of properties 30.200
Income from equity investees 173.7148.1121.9
Operating income 1,728.501,419.40562
Interest income and other, net 115.950.337
Interest expense 33.3-32.7-39.1
Earnings before income taxes 1,811.101,437559.9
Income taxes 563.1488.7168.4
Net earnings including noncontrolling interests 1,248948.3391.5
Net earnings (loss) attributable to noncontrolling interests 188.8.131.52
Net earnings attributable to Starbucks $ 1,245.7 $ 945.6 $ 390.8
Earnings per share – basic $ 1.66 $ 1.27 $ 0.53
Earnings per share – diluted $ 1.62 $ 1.24 $ 0.52
Weighted average shares outstanding:
Cash dividends declared per share $ 0.56 $ 0.36 $ 0
In reviewing the Income Statement for Starbucks from 2009 to 2011, it is evident that the company has successfully increased its profitability through performance each year by almost 10%. Its income from operation has almost tripled from 2009. Based on Starbucks’ continued plan of expansion, this financial progression depicts a continuous trend.
As noted in the financial statement above and pictured in the chart below, Starbucks obtains the majority of its revenue from its company-operated stores. This proves that if Starbucks continues its expansion of retail stores, the revenue from these sales will continue to rise as it has in the past 10 years. The company’s share earnings have also spiked in the last three years by almost doubling between 2009 and 2010 and up 31% in 2011.
The financial ratio analysis will provide an assessment of the stability and profitability of Starbucks and allow investors and shareholders to determine the probability of a profitable future. Below is a chart of different financial ratios used to describe the different criteria for Starbucks and to evaluate the past three years. Profitability – Revenue201120102009
Gross Profit 57.7% 58.4% 55.8%
EBIT Ratio 15.5% 13.4% 5.7%
The first set of ratios measures the profitability of Starbucks. These ratios measure the effectiveness of Starbucks capital. A high profitability could be attributed to effective competency. This chart shows that Starbucks have maintained an elevated profit margin, which indicates its ability to manage its largest assets costs.
The other ratio, EBIT measures the overall operating efficiency. The next chart shows the liquidity ratios of the firm which indicates how efficient Starbucks handles its short-term obligations. Short-term liquidity includes items that are to be received or paid in cash within a year.
A ratio of 2 is the ideal rate for a good standing company using the current ratio. This indicates that the company can pay its creditors and that it has more current assets than current liabilities. A current ratio below 1 signifies trouble for the company and that they may have problems meeting their creditor obligations. The difference between the current ratio and quick ratio is the use of inventory.
Financial Condition 2011-2010
Debt/Equity Ratio 20% 25%
Current Ratio 1.831.55
Quick Ratio 0.190.17
The below chart illustrates what kind of return Starbucks receives on its investments. These ratios give investors a clear mind of how well the investments are performing. The ROE ratio illustrates the returns that stockholders are earning on their investments in Starbucks. In prior years, Starbucks have consistently increased this ratio percentage and continues to rise. The ROA ratio tells investors how much profit Starbucks generated for every dollar in assets.
Investment Returns % 2011-2010
Return on Equity 28.4% 25.7%
Return on Assets 18.1% 13.8%
Based on the ratios above, it appears that Starbucks is continuing to progress successfully in profits and its ability to increase leverage and maintain a reasonably stable trend in the future. Starbucks can increase leverage by repurchasing outstanding stock and increasing debt financing. Based on the recent benchmarks over a 12 month period, Starbucks is still in line with the industry.