Starbucks Coffee Company Financial Analysis:

Final Project

Amanda N. Martin

MBA 503: Financial Reporting and Analysis

Dr. Uzell Freeman

Southern New Hampshire University

March 25, 2017

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Section I: INTRODUCTION

The American Corporation, Starbucks Coffee is known to be the world’s leading

and largest coffeehouse chain of the 21st Century, even amongst the well-known fast food

restaurant industry Dunkin’ Donuts: Starbucks’ closest competitor. This information was

learned, founded, and obtained by use of a financial analysis ratios, and numerical data

reporting: all of which allows two or more companies, such as Starbucks and Dunkin

Donuts to compare financial data indicating company growth and performance. Financial

analyses, along with their ratios and the company’s reporting of financial data to the

Generally Accepted Accounting Principles (GAAP) all are with the final intent to

determine if a company is profiting well enough for future growth or deteriorating due to

poor monetary management. They all are also an essential part of the progression of any

corporation: originally intended to provide investors, business owners, and consumers

with fundamental information detailing a business’ financial strengths and weaknesses.

With this numerical data, the company is able to make accurate decisions pertaining to

the business. In this financial analysis, we will specifically discuss Starbucks

Corporation’s financial statements for years 2015 and 2016 in further detail, sharing the

results of the performed horizontal and vertical analysis, the ending financial ratios

determined by Starbucks Coffee’s balance and income statements for both years, and

conclude by fully understanding the significance of these measurements by disclosing

Starbucks’ protocols for reporting financial statements to the GAAP.

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Section II: HORTIZONTAL and VERTICAL ANALYSIS

Out of the multiple accounting statements used to summarize financial

information about the Corporation, the balance sheet and the income statements were the

key components in completing this analysis. The balance sheet gives investors and

viewers incite on the assets, debt, equity, and the mix of financing of the business during

a specific point in time. The following calculations will provide incite on understanding

the methods in which Starbucks’ accounting for receivables and uncollectible receivables

are evaluated, the methods preferred for debt financing, and how those methods

financially inform or communicate the need for repairs.

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Starbucks
Horizontal AnalysisIncomeStatement
(InMillions)
2016 2015 IncreaseorDecrease
NetRevenues: Amount Amount Amount %

Company-operatedstores $ 16,844.10 15,197.30 $ 1,646.80 9%

Licensedstores 2,154.20 1,861.90 292.30 2%
CPG,foodserviceandother 2,317.60 2,103.50 214.10 1%
Total netrevenues 21,315.90 19,162.70 2153.2 11%

Costofsalesincludingoccupancycosts 8,511.10 7,787.50 723.60 4%

Storeoperatingexpenses 6,064.30 5,411.10 653.20 3%
Otheroperatingexpenses 545.4 522.4 23 0%
Depreciationandamortizationexpenses 980.8 893.9 86.9 0%
General andadministrativeexpenses 1,360.60 1,196.70 163.90 1%
Litigationcredit
Total operatingexpenses 17,462.20 15,811.60 1650.6 9%
Incomefromequityinvestees 318.2 249.9 68.3 0%
Operatingincome 4,171.90 3,601.00 570.90 3%
Gainresultingfromacquistionofjointventure 390.6 -390.60 -2%
Lossonextinguishmentofdebt -61.1 61.1 0%
InterestIncomeandother,net 108 43 65.00 0%
Interestexpense -81.30 -70.5 -10.80 0%
Earningsbeforeincometaxes 4,198.60 3,903.00 295.60 2%
Incometaxexpense 1,379.70 1,143.70 236.00 1%
Netearningsincludingnoncontrollinginterests 2,818.90 2,759.30 59.6 0%
Netearnings/ (loss)attributabletononcontrollinginterests 1.2 1.9 -0.70 0%
NetearningsattributabletoStarbucks 2,817.70 2,757.40 60.3 0%
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Starbucks
Vertical AnalysisIncomeStatement
(InMillions)
2016 2015
NetRevenues: Amount %Netof Sales Amount %of NetSales
Company-operatedstores $16,844.10 79% 15,197.30 79%
Licensedstores 2,154.20 10% 1,861.90 10%
CPG, foodserviceandother 2,317.60 11% 2,103.50 11%
Total netrevenues 21,315.90 100% 19,162.70 100%

Costof salesincludingoccupancycosts 8,511.10 40% 7,787.50 41%

Storeoperatingexpenses 6,064.30 28% 5,411.10 28%
Otheroperatingexpenses 545.4 3% 522.4 3%
Depreciationandamortizationexpenses 980.8 5% 893.9 5%
General andadministrativeexpenses 1,360.60 6% 1,196.70 6%
Litigationcredit
Total operatingexpenses 17,462.20 82% 15,811.60 83%
Incomefromequityinvestees 318.2 1% 249.9 1%
Operatingincome 4,171.90 20% 3,601.00 19%
Gainresultingfromacquistionofjointventure 390.6 2%
Lossonextinguishmentof debt -61.1 0%
InterestIncomeandother, net 108 1% 43 0%
Interestexpense -81.30 0% -70.5 0%
Earningsbeforeincometaxes 4,198.60 20% 3,903.00 20%
Incometaxexpense 1,379.70 6% 1,143.70 6%
Netearningsincludingnoncontrollinginterests 2,818.90 13% 2,759.30 14%
Netearnings/ (loss)attributabletononcontrollinginterests 1.2 0% 1.9 0%
NetearningsattributabletoStarbucks 2,817.70 13% 2,757.40 14%

Here, we examine fiscal years 2015 and 2016, paying closer attention to accounts

receivables (assets) and accounts payable (debts) in 2016. After performing specifically

the horizontal analysis, accounts receivables (current assets) or assets owed in invoices

by clients have increased from $719 million to $768 million. This evidence was compiled

by use of the aging method. “Companies use the aging method to ensure that Accounts

Receivable is reported at net realizable value on the balance sheet” (Harrison, Horngren,

Thomas, & Tietz, 2014, pp. 264). Therefore, the primary focus of the aging method is to

recognize the amount of receivables that is uncollectible. This popular method for

estimating uncollectible is a balance-sheet approach because it focuses on what should be

the most relevant and faithful representation of accounts receivable per the balance sheet
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date. It was noticed that Starbucks Corporation’s allowance as a percentage of accounts

receivable gross increased from 2015 to 2016 reaching the previous years of 2014 level

(year not indicated in the charts indicated above). There is no significant effect on the net

accounts receivable, even if there was not any increase amongst the two years.

Starbucks also used the allowance method. This method allows for expenses to be

properly recognized in the period they were incurred, which is the same period in which

the related sales took place (2014, pp.264) Prepaid expenses are another example of an

asset that increased by 4.73% from 2015 to 2016. This particular expense is recorded as

an asset in this case because it shows purchases such as business insurance, typically paid

in advance for the year, and later used for the good of the company. Once all assets,

including the intangible assets (Goodwill-trademarks, brands, intellectual property, etc.)

are calculated, the total assets are increased significantly due to the increase in cash.

In addition to these assets, liabilities must also be noted to understand the debts

of the company. Liabilities represent company obligations that arose from past events in

which settlements are expected as a result from an outflow of economic profits from the

corporation. For example, Starbucks’s long term debt has increased significantly from

$2.3 billion in 2015 to $3.2 billion in 2016, which tells us the company raised debts of

nearly $854 million; therefore viewers know from the horizontal and vertical analysis that

the interest expenses will also increase: ultimately impacting Starbucks profitability.

Section III: RATIO ANALYSIS

For ratios to be deemed meaningful and useful, they require reliable and accurate

calculated information. This is simply because financial ratios are commonly used as a

means to make industrial comparisons to internal goals and benchmarks. By use of

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liquidity, solvency and profitability ratios, the following section will discuss each ratio in

brief detail, which will explain Starbucks Coffee Company’s financial health and the

methods used for comparing important business growth information, such as benchmarks

and trends.

Liquidity Ratios 2016 2015

Current 1.05 0.60

Cash Asset 0.47 0.42

Solvency- Debt Management Ratios 2016 2015

Debt/Equity Ratio 0.54 0.40

Financial Leverage 0.81 0.67

(Equity Multiplier)

Profitability Ratios 2016 2015

Gross Margin (Profit) 0.60 0.59

Net Profit 0.13 0.14

LIQUIDITY:

A company’s ability to pay its current liabilities using their current assets is

formally known as liquidity or short-term solvency. To calculate Starbucks liquidity, two

ratios were used: Current and Cash Assets. Current Ratio is the most commonly used

liquidity ratio. Current ratio is a measure of short-term solvency or a form of liquidity

Running head: Starbucks Financial Analysis: Final Paper 8

ratio calculated as cash plus any cash equivalents (short-term marketable investments)

divided by current liabilities.

According to Starbucks 2016 financial statement, the company’s current ratio

indicates $1.05 in current assets for every $1 in current liabilities, or we have 1.05 times

as many current assets as we have in current liabilities. 2016 current ratio would also

indicate an increase of $0.45 from 2015’s current asset to liabilities ratio. The second

ratio (often viewed as more conservative than the current ratio) used to calculate the

liquidity of Starbucks was Cash Assets. A short-term creditor may be extremely interested

in this ratio because it measures cash over current liabilities. After the calculation was

performed, records indicate $0.47 in cash assets for every $1 in total liabilities. Cash

assets also proved to have a $0.05 increase in cash assets from the previous year of 2015.

The trend of Starbucks represents, in short, that Starbucks current ratio deteriorated from

2015 to 2016, and their cash assets slightly improved from 2015 to 2016.

SOLVENCY:

Solvency is another word for debt management when discussing financial

statements. Simply put, ratios used in a solvent manner, measures a company’s ability to

meet its obligations or its financial leverage. Companies are encouraged to be mindful of

their financial leverage ratios as to keep their financial risk at an acceptable level (2014,

pp. 512). When performed correctly, a business will have a favorable outcome as they

make preparations to seek loans from financial institutions.

Common ratios used include debit to equity and equity multiplier, which were the

two ratios used to calculate Starbucks’ debts to their amount of equity. The formula used

for this calculation consists of the total debts divided by total equity. Debt to equity ratios
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on average is about 1, based on how much entities liabilities are compared to equity.

However, this method is also based on industry specific and highly depends on a

proportion of non-current and current assets. The higher the non-current assets, the

likelihood of equity is required to financial long-term investments. Generally speaking, a

higher debt –to- equity ratio shows that a business may not be able to produce enough

cash to satisfy its debt obligations. A low debt –to- equity ratio may show that a business

has yet to take advantage of their increased profits that financial leverage may bring.

Based on the calculations for year 2016, Starbucks’ indicated $0.54 of debt per

every $1.00 of equity. In 2015, there was $0.40 of debt per every $1.00 of equity. This in

short means that Starbucks’ has a fairly low amount of debts compared to equity.

However, this is not necessarily a great situation. Yes, having a lower amount of debt

means they are financially in a position to pay long- term investments, but it also shows

that Starbucks have not taken advantage of their profits well enough to balance the scales

or financially leverage their accounts (Hayes, 2015).

After the use of the equity multiplier ratio, which equals total assets divided by

total equity, it refers to a measure of financial leverage. This ratio, alternatively known as

the leverage ratio, uses a method of evaluating the company’s ability to use debt to

finance assets. For every $1 of equity there were $0.81 of assets, but in year 2015,

Starbucks had a $1 of equity for every $0.67 of assets. After both solvency ratios were

performed, both ratios are stating Starbucks Corporation’s debt-to-equity ratio

deteriorated from 2015 to 2016 and their financial leverage or equity multiplier had the

same results of deterioration.

PROFITABILITY:
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Profitability ratios are the simplest of the other financial ratio to truly understand,

because profitability simply represents the company’s earned profits. Compared to

liquidity and solvency ratios, which assess the health of a company, the profitability

ratios show the financial plus of a company. Various profit margins are used often to

measure a company’s profitability at differentiating cost levels, including gross margin,

pretax margin, and net profit margins. Operating expenses, taxes paid, and cost of goods,

all have an effect on the bottom line of profitability. The two ratios used to determine

Starbucks profitability are gross margin and net profit ratios. Managers do well to utilize

these profitability ratios to inform investors and stakeholders of the financial well being

of the company.

Gross profit margins ratios are simply defined as the gross profit to sales revenue.

The percentage is calculated by which gross profit exceeds production costs. It also

reveals how much the company will earn by considering the costs incurred for production

of its products or services. Gross margin uses the ration of the company’s gross profit

divided by total sales (revenue). Starbucks financial ratio for gross profit reveals 60%

gross margins. This is a16% increase from the 44% national industry average of gross

margins.

With regards to net profit ratios it is the probability calculated as after tax net

profits divided by sales. It is typically represented as a percentage. This shows the

amount of each sales dollar left after all expenses have been paid ("Starbucks Financial

Strength Comparisons", 2017). Net margins are another critical metric for Starbucks,

because it shows the business’ effectiveness in covering operating costs, financing and

expenses. In contrast of the operating margin ratio, the net margin ratio indicates
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Starbucks’ financial effectiveness to equity shareholders. According to Starbucks’ 2016

financial statement and after the net margin ratio was performed, it was noted that

Starbucks’ net margin was 13%, which is significantly higher than the industry’s average

of 4.15% ("Starbucks Financial Strength Comparisons", 2017).

BENCHMARKS:

A sure way to avoid problems associated with comparing companies of two

different sizes is to use financial ratios, or the ones sampled above. Such financial ratios

are ways of comparing between two or more financial items to identify a company’s

performance.

On average for Starbucks’ kind of industry, it was reported to have $0.45 worth of

debt per every $1 of equity. Meaning, Starbucks is operating at below half the amount of

debts than a neighboring or similar company ("Starbucks Financial Strength

Comparisons", 2017). In summary, Starbucks is operating on 60% margins with low

debts averaging around only $0.54 of every equity $1. Based on my Starbucks analysis,

Starbucks seems to be in an adequate financial state compared to other companies within

their industry. Though net profit ratio decreased by 1% in year 2015 to 2016, their

revenue growth was promising.

Section IV: RULES OF FINANCIAL REPORTING

False information regarding a business leads to overall inconsistent comparisons

between publicly traded companies. Rules and standards were created and are mandated

to ensure uniform financial reports between corporations. Business financial statements

are prepared in accordance with Generally Accepted Accounting Principles (GAAP),

which is “a combination of authoritative standards and commonly accepted ways of

Running head: Starbucks Financial Analysis: Final Paper 12

recording and reporting accounting information” (Tarver, 2015). To put it simply, it

improves the clarity of financial information and communicates the business in an honest

manner. Starbucks Coffee Corporation is not an exception to the GAAP’s rules and

procedures. They must adhere to the accounting practices just as every other business.

This section will disclose Starbucks’ control procedures, the reporting of segments, the

importance of Starbucks’ reporting estimates and assumptions, investments and fair

value, and will explain the requirements and significance of lease structure.

CONTROL PROCEDURES:

To begin, accounting control is a method and procedures are the methods

implemented by a firm (typically an accounting firm) that ensures financial statements

are validated and accurate. It is important to note that controls do not ensure compliance

with the GAAP or laws and regulations, but are simply there to assist the corporation

with complying with the regulations outlined by the government. Starbucks’ information

was collected, communicated, and reported to appropriate management. Their control and

procedures were designed to guarantee that substantial information required to be

disclosed in their financial reports were submitted under the GAAP by Starbucks’

principal financial officer and principal executive officer to allow more timely decisions

regarding required disclosures. Each fiscal year was carried out by an evaluation under

the supervision and participation of management for the effectiveness of the design and

operation of their disclosure controls and procedures; after which was determined that the

disclosures were indeed effective and accurate. Starbucks’ management is largely

responsible for establishing and maintaining accurate and adequate internal control over
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financial reporting. Internal control determines that the information outline and displayed

within the financial statement has a reasonable equivalence in harmony with the

accounting principles outlined by US standards. However, because of the inherent

limitations of internal control over financial reporting, it should not be intended to

provide absolute assurance of misstated financial statements. There were no changes or

inconsistencies in the internal control over financial reporting.

SEGMENT INFORMATION:

Next, the reporting of segment information is required for publicly held

companies, which basically means the “operating segments of an entity in the disclosures

accompanying its financial statements”(Bragg, 2013). Segment reporting’s goal is to give

pertinent operating information to creditors and investors concerning the financial results

and companies financial position, which can be used as the foundation for their decisions

related to the company. According to the GAAP, operating segment participates in

corporation activities “from which it may earn revenue and incur expenses” (Bragg,

2013), had private financial information available, and their results are regularly

reviewed by the company’s principal operating decision maker for performance appraisal.

Starbucks’ segment reporting includes their chief executive officer and chief

operating officer preparing the same foundation that the chief operating decision maker

manages the segment, evaluates the financial results, and makes key operating decisions.

It was noted on Starbucks’ Annual Report (2017) that the “Americas segment is our most

mature business and has achieved significant scale”. The Americas operations sell coffee,

beverages, complementary food, and packaged coffee products, which are focused,
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selected, merchandise. Starbucks made changes to their segments to generate sales

appropriate to its locations; however, none of the changes made material impact on the

composition of revenue mix by product type.

ESTIMATES AND ASSUMPTIONS:

Estimates and assumptions are explained to be just that an estimation or an

“approximation in financial statements of the amount to be credited or debited on items

for which there is no precise means if measurement” (Murko, 2017). Because these are

estimations, Starbucks’ calculations contain uncertainties because they require

management to make an educated guess or assumptions to determine future cash flow

and assets. Some methods used by management include projected revenue growth,

operating expenses, and the use of forecasting assets and selecting an appropriate

discount rate. These estimations are of course subjective and the ability to realize cash

flow and assets for a future date is affected by certain ongoing factors such as

maintenance, changes in the economy and operating performance. Starbucks reported no

significant changes in any of the previous estimates or assumptions that had a material

impact on the outcome of the impairment calculations. As a routine, Starbucks reassess

estimated future cash flows and asset values often that may cause material impairment

concerns in the future.

INVESTMENTS AND FAIR VALUE:

Fair value is known to be the “practice of measuring assets and liabilities at

estimates of their current value” (Ramanna, 2013). Many investments are viewed as
Running head: Starbucks Financial Analysis: Final Paper 15

mark-to-market accounting, which changes in value on the balance sheet as market

conditions change. Fair value can also represent the value of a company’s assets and

liabilities when a subordinate company’s financial statements are combined with a parent

company (Staff, 2016). Business ownership of less than 20% of stock can dictate which

investors are not able to exercise significant involvement or participate in shareholder

meetings. Starbucks’ short and long-term investments contain investment- grade debt

securities, or available-for-sale, which are recorded at fair value and unrealized gains and

losses and net of tax are recorded as a component of accumulated other comprehensive

income. Starbucks evaluates the available-for-sale securities for other short-term issues

that may occur on a quarterly basis.

LEASES:

The term lease, or contract is customarily between two parties, the lessor and the

lessee. The lessor is the owner by law of the asset; the lessee normally obtains the right to

use the asset in return for rental payment. There are various forms of leases: finance,

operating, and classification to name a few. Reporting of leases are now required because

every entity must recognize assets and liabilities ascending from their leases. As a result,

it will significantly gross-up a lot of businesses’ balance sheets and is now recognized as

a finance lease. Starbucks’ noted in their financial sheets that many of their roasting

facilities are own, as opposed to the majority of their warehousing and distribution

locations are leased. Company operated stores were almost all leased in the Americas and

various locations worldwide, training centers, storage, and administrative offices are also
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leased (Retallack, 2015). Starbucks was sure to report the varying value related to build-

to-suit lease arrangements as a financing lease.

Section V: CONCLUSION

Each of the above reports were calculated specifically for Starbucks’ Coffee

Corporation and provided information needed to compare annual business performance to

other comparable businesses within similar industries. The information shared by

Starbucks helped determined if their business strategy of multiple, worldwide locations

and offering a variety of food and beverage options outside of the traditional coffee line

made their company more competitive within their industry. This decision was an

apparent success. It also identified their strengths and weaknesses: benchmarking their

performance over time, which allowed for investors to track progress over time as

Starbucks made changes to locations and made overall improvements in their operations.

As shown by this report, Starbucks showed effective performance and their chief operator

was able to make more informed decisions about the corporation’s direction for the

future.

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