Starbucks Financial Statement Analysis Essay Example

It has three reportable operating segments: United States (US), International, and Global Consumer Products Group (CPG). The US and International segments comprise company-operated retail stores and some specialty operations. Licensed retail stores are considered specialty operations within the US.

International specialty operations involve retail store licensing operations in approximately 40 countries and foodservice accounts in Canada and the United Kingdom (Starbucks Corporation, 2010). The CPG segment includes packaged coffee and tea, as well as Starbucks VIA® Ready Brew and other branded products sold globally through various channels, such as grocery stores, warehouse clubs, convenience stores, and US foodservice accounts. CPG conducts a substantial part of its business through licensing agreements and a joint venture with a prominent consumer products business partner (Starbucks Corporation, 2010).

Starbucks faces competition in the coffee beverage sales market from quick-service restaurants (QSR’s) and specialty coffee shops like Tully’s and Caribou Coffee. They also face direct competition from major competitors like McDonalds and Dunkin’ Donuts. Starbucks' packaged coffees and teas directly compete with other specialty coffees and teas, such as Peet's, Dunkin’ Donuts, and Millstone, which are sold through supermarkets, club stores, and specialty retailers (Starbucks Corporation, 2010).

The company faces competition from restaurants and specialty retailers for both prime retail locations and qualified staff to run their stores. Here is some chart comparison information: [pic] [pic] [pic] Corporate Social Responsibility Report Starbucks has been at the forefront of promoting social responsibility as a company. They actively support local charities that concentrate on children, the environment, arts, and AIDS research. Additionally, they donate coffee to homeless shelters in the same state where their stores are situated.

Starbucks Corporation has formed

partnerships to distribute books as part of annual campaigns, resulting in the donation of more than 320,000 new books. Furthermore, Starbucks has collaborated with CARE and GLEP in Guatemala to address child labor issues and safeguard workers' rights to association. The Auditor's Report evaluates the internal controls for financial reporting of Starbucks Corporation and its subsidiaries according to the United States' Public Company Accounting Oversight Board Standards. This report targets the company's Board of Directors, current shareholders, and potential investors.

The report examines potential misstatements or fraud in the company. The auditors are responsible for planning and conducting the audit to ensure effective internal control over financial reporting was maintained in all significant aspects. They also evaluate the risk of any significant weaknesses and assess the effectiveness of internal control design and operation based on that risk.Auditors are responsible for assessing a company's internal control over financial reporting, which involves maintaining accurate records of transactions and asset dispositions, ensuring proper transaction recording for GAAP-compliant financial statements, verifying alignment between receipts/expenditures and management/director authorizations, and providing reasonable assurance against unauthorized acquisition/use/disposition of assets that could impact the financial statements.

Starbucks hired Deloitte & Touche LLP from Seattle, WA to audit their financial statements. The market value of non-affiliate-held voting stock was $16 billion on the last business day of the second fiscal quarter as reported by NASDAQ Global Select Market's closing sale price on March 26, 2010. As of November 12, 2010, Starbucks had 741.1 million shares of common stock outstanding. They also authorized 7.5 million shares of preferred stock but none were outstanding as of October 3, 2010. The total paid-in capital is $145.6 million ($106.2 +

$39.4). Under Washington State law, repurchased shares are considered retired and are not classified as treasury stock in the financial statements.

The process of repurchasing shares involves deducting the par value from common stock and using the excess price from additional paid-in capital and retained earnings once the capital is depleted. In the last three quarters, Starbucks has paid dividends of $0.10, $0.13, and $0.13 per share. The graph below compares Starbucks' total return to shareholders from October 2, 2005, to October 3, 2010, with the performance of the S&P 500, NASDAQ Composite Index, and S&P 500 Consumer Discretionary Sector.

Liquidity ratios assess an organization's ability to meet short-term obligations. Starbucks currently holds a current ratio of 1.55 which indicates favorable short-term financial standing. However, their quick ratio is slightly below the desired level of 1.0 accepted by most creditors at 0.98.

With a current cash debt coverage ratio of 1, Starbucks can cover its current liabilities with its operating activities.

The inventory turnover for Starbucks is calculated as Cost of Goods Sold divided by Average Inventory resulting in a value of 3.32 (8010/(543.3+664.9)/2). This implies that there would be four inventory turnovers per year indicating it would take three months to sell all available inventory.

Solvency encompasses asset management, debt management, and interest coverage evaluation metrics such as Debt to Total Assets Ratio (Total Debt/Total Assets) which equals .42 for Starbucks.The Times Interest Earned metric is determined by dividing Income before Income Taxes and Interest Expense by Interest Expense yielding a value of 44.94The Cash Debt Coverage Ratio can be determined by dividing the Net Cash Provided by Operating Activities by the Average Total Liabilities. In this case, the

ratio is equal to 1704.9 divided by ((2703.6 + 2519.9) / 2), which simplifies to 1704.9/2611.75 = .65.

These ratios are valuable for assessing the overall financial risk of the company and accounting for changes in liabilities and cash flows over time.

Profitability ratios evaluate the company's ability to generate earnings compared to costs and expenses within a specific period. One such ratio is Profit Margin, which is calculated by dividing Net Income by Net Sales, resulting in a value of .088 (945.6/10707.4 = .088).

The Cash Return on Sales ratio can be determined by dividing Net Cash Provided Operating Activities by Net Sales: 1704.9/10707.4 = .159.

Another important ratio is Asset Turnover, which measures how effectively assets are used to generate revenue and is calculated as Net Sales divided by Average Assets: 10707.4/6385/.9 = 1.68.

Return on Assets indicates the company's profitability relative to its total assets, found through dividing Net Income by Average Assets: 945./6385/.9 = .

A high cash return on assets ratio suggests that investors may anticipate a higher return due to increased availability of cash for reinvestment or replacements within the company.

To calculate Return on Common Stockholders Equity, divide Net Income by Average Common Stockholder Equity.In this case, it equals $9457 divided by (22841+24909+30457+36747) divided by four, resulting in 0.329The Net Income divided by Weighted Common Average Shares Outstanding formula is used to calculate Earnings Per Share. Using the given numbers (945.6 and 1508.6), it can be calculated as follows: 945.6 divided by (744.4 + 764.2) divided by 2, which equals 1508.6.

The Price/Earnings Ratio is determined by dividing Market Price per Share of Stock by Earnings Per Share. Therefore, with a Market Price per Share of

Stock of 25.89 and Earnings Per Share of 1.25, the ratio is calculated as 25.89 divided by 1.25, resulting in a ratio of 20.71.

To find the Payout Ratio, divide Cash Dividends per Share by EPS.With Cash Dividends per Share being171 and EPS being945-6,the ratio is calculated as171dividedby945-6,resultingin0-18.

In terms of Cash Position, it is stated that Cash provided by operating activities was $300 million higher in 2010 compared to 2009 (specifically, $1-7 billion compared to $1-4 billion). The10-K report explains that this increase is due to higher net earnings during the period.

Regarding investing activities, Starbucks utilized a portion of its available cash to buy US Agency investment grade bonds.The company also allocated capital expenditures towards remodeling and renovating company-operated retail stores, opening new retail stores,and investing in updated information systems.

Cash used for financing activities amounted to 346 million, including repayments of commercial paper and short-term borrowings under the credit facility. This was offset by dividend payments of 171 million and a buy-back of common stock worth 286 million. In terms of performance, the following information compares Starbucks to similar companies and industry standards. Furthermore, Starbucks offers higher wages and benefits compared to its competitors. [pic] In January 2008, the company's founder Howard Schultz resumed the position of President & CEO to tackle the decline in US retail sales and address its global support structure.

Entrepreneurs may not necessarily possess the skills to effectively manage a company. While starting a business requires creativity and determination, successfully running one calls for discipline and delegation. In the year 2000, Howard Schultz, the CEO of Starbucks, decided to step back from daily operations and serve as Chairman of the Board. This

allowed him to concentrate on expanding Starbucks globally. However, in late 2007, Schultz became aware of concerns raised by Starbucks' partners. This realization led him to write a now-famous memo, acknowledging that the company's decline was primarily due to internal issues rather than economic downturn. Determined to revive Starbucks' initial zeal and confidence in its future, Schultz returned to his position with a renewed sense of urgency. Alongside him, Starbucks management formulated a Transformation Agenda. This strategy aimed to bring Starbucks back to its origins by prioritizing their coffee, stores, customers, and creating, maintaining, and promoting the Starbucks Experience. The goal was to counteract the impacts of the recession. (Schultz, p.7)The Transformation Agenda, outlined in 2008 by Starbucks Newsroom, aimed to enact five strategic shifts. These shifts included restructuring costs to facilitate long-term operating margin growth, improving the store portfolio by closing underperforming locations, enhancing the value and rewards platform to align with Starbucks' premium brand, investing in coffee leadership, and fostering a unified company with a shared purpose. While not explicitly labelled as a Balanced Scorecard, the Transformation Agenda aimed to implement new strategies to drive positive change.

Schultz's initial step involved translating the strategy into operational terms. Starbucks had experienced rapid growth, but had veered away from their founding principles. The executive team assessed the company's strengths and weaknesses, with a focus on their original forte of providing high-quality coffee in a welcoming neighborhood cafe. The weakness they identified was their extensive expansion, resulting in a loss of the unique atmosphere that initially set Starbucks apart from competitors. In 2008, two significant threats emerged: numerous imitators, including McDonalds, offering cheaper freshly brewed coffee, and

the precarious economic state of their market.

Though Starbucks had not viewed it as a weakness the previous year, a significant portion of the company's expenses were fixed costs associated with their own coffee growers, processing plants, and retail stores. In order to address this issue and seize any opportunities, Starbucks implemented their Transformation Agenda. They evaluated their products and customers, ultimately prioritizing operational excellence. They refocused on their original values of quality, ease of purchase, and creating the Starbucks Experience. On March 4, 2008, Schultz addressed top management globally, expressing disappointment that they had lost sight of the customer and their love for coffee. He questioned why they had become consumed by bureaucracy and quarterly growth and stopped holding their business operations to the same high standards as their coffee. The first step in turning things around was to restructure the company to be more profitable by streamlining, retraining, and diversifying. This involved reducing corporate staff by 1,000 positions and cutting permanent costs by $400 million. Schultz emphasized the importance of eliminating expenditures that did not directly impact consumers or compromise the company's culture and values.Starbucks conducted an analysis of its existing stores' profitability and adjusted its expansion plans in order to establish a more robust store portfolio. The company acknowledged that its focus had gradually shifted from local coffee shops to nationwide megastores. In his book, Schultz expressed initially feeling a sense of failure when reviewing the list of stores to be shuttered. However, he later recognized that "success is not sustainable if it’s defined by how big you become" (Schultz, p.166). The rapid expansion had caused damage to the Starbucks brand. To rectify

this, the company took the first step of reducing the speed of new store openings and closing underperforming locations. This included shutting down 600 stores in the United States and 75% of their Australian stores.

Starbucks takes pride in being a responsible company with a global mission of providing the best coffee while remaining true to their core values as they grow (Starbucks, 2002, p. 3). In terms of product supply, Starbucks has made commitments to fixed-price purchases in order to ensure a consistent supply of high-quality green coffee and mitigate the risk of fluctuating coffee prices. When it comes to their employees, known as "partners," this includes both full-time and part-time workers who receive healthcare benefits, can participate in the Bean Stock program, get a 25% match for their 401k plan, and are entitled to a free pound of coffee every week.

Starbucks has a turnover rate of only 50%, compared to the industry's rate of 400% (Starbucks, 2002, p10). Their commitment to environmental leadership is outlined in their mission statement and encompasses various aspects of their business. To achieve this, Starbucks remains conscious of environmental concerns, communicates with employees, seeks innovative solutions for change, promotes the use of eco-friendly products, and acknowledges the financial responsibility needed for sustainability. Moreover, Starbucks has made substantial efforts and wise investments to expand its presence in diverse regions.

Increasing the company’s bargaining leverage and building brand equity are facilitated by this. To establish a global retail presence and decrease dependence on a limited number of markets, both existing and new/emerging countries are targeted for expansion. However, the company’s profitability would be impacted by the rising coffee prices. To streamline operations,

a potential solution is to introduce a Starbucks card that includes preferred drink and payment details within it. On entering the retail outlet, customers can swipe this card, allowing the IT system to detect their chosen drink, place the order for preparation, and deduct funds from their account. Ultimately, this would result in a more efficient process, with the drink ready for the customer.

Another idea would be to expand on the prior idea of using a mobile device ‘application’ to order and purchase a drink prior to pick up. Strengths • Wide geographic presence strengthened by continued expansion • Company is currently profitable • Strong ethical values and mission statement • Strengthening presence in alternate distribution channels • Research and development capabilities leveraged to strengthen product portfolio Weaknesses • Product recalls negatively affect brand image (glass water bottles, grinders, for example) • Almost all cafes are located in the US • Highly dependent on their main advantage - coffee Opportunities • Growing presence in key Asian markets Investments to improve customer interface