The management’s assessment of the financial condition for Star Bucks agrees with the previous analysis of the company’s financial statements. A close examination of the consolidated income statement confirms that the net revenues earned in 2015 by the entire business increased by 17% from 16.4 billion in 2014 to 19.2 billion in 2015. This net increase in the incomes earned by the business has been contributed to by the segmental growth of the business revenues. A trend analysis shows that the net revenues from the company operated stores, licensed stores, and the CPG, food service and others increased by 17%, 17% and 12% respectively from 2014 to 2015. Further, the trend analysis shows a growth of operating income from 6.8 billion to 8 billion in 2015.
Ratio analyses on the other hand confirm the management’s assessment of a growth in the operating margin from 18.7% in 2014 to 18.8% in 2015. The increase in the operating margin could however be bigger were it not for the increased salaries expense and the aforesaid change in ownership. The general financial performance of the business has tremendously improved from 2014 to 2015 and has witnessed significant expansion in revenues coupled by minimal cost influx. According to the management’s commentary, a bigger proportion of the total company revenues are generated from the company operated stores which account for up to $ 2.2 billion out of the total $ 2.7 billion recorded as growth in incomes from 2014 to 2015. The increased revenues have been attributed to the operational expansion in Japan and incremental sales volumes across the entire company operated stores.
The increased revenues could have given the company more profits were it not for the unfavorable economic conditions which have presented themselves in the business operations as foreign currency fluctuations and cost the company up to $ 522 million in the financial year 2015. Licensed stores have also recorded a 17% increase in the net revenues generated from $ 1.5 billion to $ 1.8 billion which is approximately $273 million. According to the management, this revenue growth has been caused by expansion of operations and the inception of 1,075 new business units within the year. CPG, food service and other revenues also increased from $ 1.8 billion in 2014 to $ 2.1 billion in 2015.
The costs of sales have proportionately decreased from 2014 to 2015 hence the resultant growth in the gross profit margins from 0.58 in 2014 to 0.59 in 2015. The cost of goods sold including occupancy costs have significantly reduced from 42% of the revenues in 2014 to 41% of the revenues in 2015. The net earnings attributable to Starbucks have also increased by $ 689 million (33%) from 2014 to 2015. The proportionate percentage of net earnings to the bet revenues have also increased from 13% in 2014 to 14% in 2015. This is an increase in the net profit margin from 0.13 in 2014 to 0.14 in 2015.
Despite the slight growth in profitability, the company’s debt to equity ratio has increased from 0.39 in 2014 to 0.40 in 2015. The implication of an increasing debt to equity ratio in a company is an increasing financial risk due to the limited ability of the equity funds to settle the debt. The total long term debt for the company over the two years has increased from $ 2 billion to $ 2.3 billion. General administrative expenses and depreciation also increase reasonably which further reduces the net profits earned by the business. The ownership change in Japan and the dismal performance of the branch in Malaysia have negatively impacted the operating margins for the business in the year. This has also caused a decline in the income from investees and it indicates that the decisions to change ownership or open other branches were not carefully evaluated to ascertain the underlying costs and benefits.
The company has also incurred a rising interest expense which can be attributed to the increased borrowing. The acquisition of more assets within the year also seems to have cost the company more than the return generated from the acquired assets. A 16% increase in the total assets versus a 17% increase in the revenues represents a significantly low rate of return on the assets. This further implies that the assets are either unutilized or are being underutilized or even misused since they are not significantly contributing to the growth of revenues.
In a bid to resolve the underlying challenges, the business needs to conduct thorough research and do proper planning before venturing into any new market. The management of the company further needs to adopt stringent cost control measures in a bid to achieve minimal costs and increase the revenues hence the profit margins. The management needs to evaluate and refrain from incurring the avoidable and unnecessary costs in the business. The acquisition of capital assets should also be carefully evaluated to estimate the expected profitability of the asset being purchased. Above all, any asset purchased into the business needs to be fully utilized to achieve maximum efficiency and thus drive profits. Due to the increasing depreciation expense, management needs to review the old and unproductive assets for disposal. This will save the company high depreciation charges and high maintenance costs. The decline in fixed asset turnover from 2.5 in 2014 to 2.3 in 2015 amid an increase in capital spending is a further attestation to the fact that the company assets are not fully employed. The increase in assets in the year is also confirmed by the increase in cash flows utilized in financing activities; 2.3 billion in 2015 up from 6213.3 million in 2014.
Excessive and unnecessary borrowing can plunge a business into serious difficulties. Since the management acknowledges the $ 6 million interest expense incurred between 2014 and 2015 had a negative impact on the profits, there is need for strict control on debt financing. Due to the little returns derived by the business from the non- company operated stores; there is a great need for the company to pump in more investments in its own operated stores which seem to make substantial profits. The company generally needs to take decisive measures to seal the minimal loopholes through which it’s losing revenues or eating into its profits.
References
Starbucks Annual reports. (2016). Starbucks Coffee Company. Retrieved 15 May 2016, from http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsannual
