Starbucks Corporation Financial Analysis 2016



Starbucks Corporation Financial Analysis 2016Finance, FIN440A Report Presented toProfessor Dwight D. HamofThe Master’s University byJason BockDecember 5, 2016Tables of ContentsReport Structure and Explanation……………………………………………………………........3Company Overview……………………………………………..…………………...…………...3Competitor Analysis………………………………………………………………………………3Income Statement Analysis…………………………………………………………………….…4Revenue……………………………………………………………………………………4Net Income…………………………………………………………………….…………..5Gross Profit Margin……………………………………………………………………….6Operating Profit Margin…………………………………………………………………..6Balance Sheet Analysis………………………………………………………………….………..7Current Ratio and Acid-Test Ratio………………………………………………………7Debt Ratios…………………………………………………………………….…………7Cash Flow Statement Analysis…………………………………………………………………..8Net Working Capital……………………………………………………………………..8Earnings Per Share (EPS) ……………………………………….……………………………….9Stock Valuation……………………………………………….…………….……………………10Bottom Line…………………………………………….…………….…...……………..10P/E ratio……………………………………………………….….….……….…………………11Conclusions……………………………………………….……….…………………………….11References……………………………………………….……….………………………………13Report Structure and ExplanationThe following report provides an analysis for the Starbucks Corporation through the examination of their annual financial data from the years 2013-2016. The following financial statements are included and examined: Operations Statement, Balance Sheet, Stockholder’s Equity, Statement of Cash Flows, Financial Ratios, and Stock Analysis. The report will take the prior statements and define financial ratios that pertain to the company and its performance. Additionally, an explanation of competitor analysis, function, and risk of investment will be assessed. The report will be concluded with a summary of the findings as evaluated through the financial ratios. Company Overview Starbucks Corporation is a high-quality coffee establishment that provides a variety of cold and hot beverages as well as food items, and ground coffee in locations worldwide including: U.S., Canada, Latin America, China, Asia Pacific, Europe, the Middle East, and Africa. Starbucks provides not only beverages and food but also an experience within its warm and inviting stores. Their mission is “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.”Competition The primary competition of Starbucks is other coffee shops and quick service restaurants. According to the Fiscal 2015 annual report “our coffee and tea products sold through our Channel Development segment compete directly against specialty coffees and teas sold through grocery stores, warehouse clubs, specialty retailers, convenience stores, and U.S. foodservice accounts and compete indirectly against all other coffees and teas on the market.” The analysis below compares 4 companies including Starbucks, Dunkin’ Donuts, McDonald’s, and Nestle. After launching its “America runs on Dunkin” ad campaign in 2006 Dunkin' Donuts d its customer strategy with traditional advertisements and representing itself as an American brand, whereas Starbucks on the other hand, relies more on world of mouth to spread its brand and coffee by utilizing a wealthier and upscale approach. Income Statement AnalysisRevenueOver the past four years, Starbucks has been experiencing a steady increase in revenue from $14,866,800 in 2013 to $21,315,900 in 2016. In 2014 alone, total net revenues increased $2.7 billion, or 17%, primarily because of the increased revenues as a result of the company operated stores that contributed $2.2 billion. The constant growth in store revenues has been primarily driven by incremental revenues from the acquisition of Starbucks Japan that is approximately $1.1 billion, an increase in store sales at a 7% growth rate, and incremental revenues the past 12 months from 550 Starbucks company-operated store openings (approximately $590 million).By the end of fiscal 2016, there is an expected growth in revenue of 10%. This is driven by store sales, 1,800 new stores, and a 53rd fiscal week this is expected to contribute 2% to revenue growth. “Total net revenues increased 17% to $19.2 billion in fiscal 2015 compared to $16.4 billion in fiscal 2014” (Form 10-K).Net Income“Legal Proceedings On November 12, 2013, the arbitrator in our arbitration with Kraft Foods Global, Inc. ordered Starbucks to pay Kraft $2,227.5 million in damages plus prejudgment interest and attorneys' fees. We estimated prejudgment interest, which included an accrual through the estimated payment date, and attorneys' fees to be approximately $556.6 million. As a result, we recorded a litigation charge of $2,784.1 million in our fiscal 2013 operating results” (Form 10-K, 2015).As a result of this arbitration, Starbuck took an incredible hit in regards to income. The litigation charge was paid in the fourth quarter of 2013 and this is why we see such a low income in 2013 as opposed to the gradual increases in 2014, 2015, and 2016. This turn of events did not cause significant adverse effects to Starbucks Corporation. Gross Profit MarginGross profit margin indicates the percentage of revenue that is available to cover operating expenses along with other expenditures. Starbucks Corp.'s gross profit margin improved from 2014 to 2015 and from 2015 to 2016.Operating Profit MarginThe negative profit margin in 2013 is a result of the litigation with Kraft in 2013. That is why we see such a spike from 2013 to 2014. Operating income increased to $3.6 billion in fiscal 2015. That year the operating margin was 18.8%. The factors driving the operating profit margin expansion was primarily sales leverage, as a result of the ownership change in Starbucks Japan. Starbucks was able to significantly rebound from 2013 to 2014 after such a tough year profit wise.Balance Sheet AnalysisCurrent Ratio and Acid-Test RatioThis section of the analysis examines the key portions of the assets and liabilities sections. From 2013-2016 Starbucks has kept its current assets higher than their current liabilities, and this results in quality current and acid ratios, thus supporting healthy liquidity within the company. The debt ratio provides a view at the sum of the carrying values of all debt plus capital lease obligations within the balance sheet. Starbucks Corp.'s total debt increased from 2014 to 2015 as well as from 2015 to 2016. The debt ratio decreased from 2013 to 2014 again affected by the Kraft litigation. This occurred because the equity took a significant hit in 2013.Cash Flow AnalysisNet Working Capital Working capital measures a company’s efficiency and operating liquidity. The calculation of working capital is subtracting current liabilities from current assets. It is important indicator of the business and its ability to maintain its normal operations without amassing additional debt obligations. In 2014, the increase of net working capital is a result of the Kraft arbitration matter that required a payment of $2.8 billion. In the fourth quarter of 2014, Starbucks sold 82% interest in its Starbucks Coffee Chile S.A. in order to do a joint venture. By doing this transaction they were able to make a gain of $45.9 million. Earnings Per ShareEarnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of?common stock.?Earnings?per share serves as an indicator of a company's profitability. Starbucks possesses a reliable earnings per share. Earnings per share for 2015 increased to $1.82, compared to $1.35 in 2014. Shareholders are gaining a higher profit per share owned. This is primarily due to a fair value adjustment from equity interest in Japan’s Starbucks, resulting in a gain. 4 Year Starbucks Stock ValueThe Bottom LineStarbucks stock continues to rise. From analysis the stock price over the 4-year period between 2013 and 2016 we see the steady rise in stock, with the exception being in the fourth quarter of 2013 and early 2014 because of the Kraft arbitration. Starbucks is poised to continue to see tons of growth. Recent initiatives such as the mobile ordering, which is expected to help them maintain in store sales. Not only is the company poised to grow in the U.S., Starbucks has tons of growth opportunities internationally. Combined with the company’s digital initiatives such as mobile ordering, which should help Starbucks maintain its same-store sales growth, help promote a low risk and respectable bottom line for the company. Price / Earnings RatioStarbucks is a growth company. While its stock is trading at a “premium”, the company has shown double digit growth. Its P/E ratio is over 30 and this can still offer upside to investors who are looking for a growth investment with less risk. Competitor McDonalds in 2015 which was 24.4 was better, but investors still have incentives to invest in a steady company life Starbucks, as opposed to McDonalds. Starbucks is more similar along the lines of Chipotle who had a 33.5 P/E. ConclusionStarbucks Corporation has shown significant process across the board in their financial statements of the past 4 years of analysis. Despite the Kraft arbitration in 2013, Starbucks has handled adversity well and continues to show growth. For the fiscal year 2015, revenue increased to 16.5%, up from 10.5% in 2014. Their 3 year annualized growth rate is 13%, and that is compared to the compared to the 8.3% industry average. Starbucks intends to open 500 stores in China every year until 2021, in which they are planning an aggressive strategy in order to extend their growth rate in the future years. ReferencesInvestor Relations. (n.d.). Retrieved December 04, 2016, from<; “Ratio Analyis: Using Ratios”, Investopedia. (n.d.). Retrieved December 04, 2016< Corporation Common Stock (SBUX). (n.d.). Retrieved December 04, 2016, from<;“Starbucks Stock Climbs Despite Valuation Concerns”, Investopedia. (n.d.). RetrievedDecember 04, 2016 (SBUX) <; “Who are Starbucks main Competitors?”, Investopedia. (n.d.). Retrieved December 04, 2016<;“Why Starbucks Stock Is Worth Its Premium Valuation”, Investopedia. (n.d.). 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