(Topic of the paper)
Introduction:
Our analysis of a company listed on US Stock Exchange is based on Starbucks Corporation, while for with the competitor within same industry, we shall be analyzing financial statements of Dunkin Donuts.
Starbucks Corporation is a leading marketer and retailer of coffee, having its outlets in 60 countries around the world. The stock of the company is listed on NASDAQ Stock Exchange with the tick symbol of ‘’SBUX’’. Apart from selling coffee, the company is also involved in tea, beverages and variety of fresh food items. Today, Starbucks is a leading and most recognized coffee brand in the world. The most popular brand of Starbucks, K- Cup sources 72% of the total revenue for the company alone.
Basic Fundamentals:
Current Market price: $79.82
Market Capitalization: $59.86 Billion
Enterprise Value: $58.10 Billion
Revenue: $ 13.29 Billion(2012)
Profit: $ 1.38 Billion(2012)
Beta: 0.79
52 Week Change: 72.33%
Trend In Market value of Share Price: (Initial Analysis)
At the time of writing, Starbuck Corporation Stock was trading at $79.82 with a 0.97% rise in price compared to previous closing day. The stock price have followed an increasing trend restraining our analysis to one year. From the level of $42, the stock is now trading at the level of $79.82, with 52 week range of 45-81.08 while the next earning declaration is scheduled on 30th October, 2013. The Stock has been 6000% higher when compared to the price of its Initial Public Offering.
Starbucks Corporation- Strengths:
As for the Brand- ‘’Starbucks’’, people see it as a big luxury brand in coffee industry. This indeed is a significant strength for Starbucks as this ideology gives it a competitive edge over other brands in the industry as people associate it with high quality and a company with popular existence.Thus its indeed important for our analysis to find out the real strengths of Starbucks Brand that make it so popular among both Consumers and Shareholders.
Sound Financial Numbers
The company in its recent annual report of 2012, declared a Total Revenue of $13.3 billion which was 14% more than previous year. During our 4 year of trend analysis of the company, the revenues of the company has shown an increasing trend on account of recent 7% growth in comparable stores sales and in particular to 50% increase in revenue by Channel Development. Since primary strategy of the company is to expand its operations at a rate higher than its competitors, it was really important to analyze how the existing stores are performing apart from looking up performance of newly opened stores.
Reviewing comparable store sales growth of the company since 2008 that was hovering in -3%, the company in its SEC Filing declared that this decrease was on account of increase in value per transaction which was offset by decrease in total number of transactions. The condition went more worse when this multiple was reduced to -6%. However, the current scenario seems better with now store sales growth at 8% during 2011 and 7% during 2012.
Most interesting and appreciated attribute of Starbucks Management was reduction in Common Size Factor Percentage of Selling and Distribution Expenses to Sales Ratio. As of 2012, the company reduced this percentage from 37.08% to 35.38% which was the main driver for increase in operating as well as net income. The graph below indicates how Starbucks has improved its revenue/share since 2008.
Operating Income of the company was $2 Billion as compared to $1.7 billion in 2011. As a result, the operating margins of the company improved from 14.8% to 15% during 2012. The expansion was result of increased revenue and absence of charges relating to closure expenses of Seattle’s Best Coffee Store. The ever improving operating margins of the company where the company has made a big leap from 4.9% operating margins in 2008 to 15% margin in 2012 indicates efficiency of management where they have shifted their focus to cost management and strong pricing strategy. Even though, US market is suffering from tight consumer spending, Starbucks have managed to maintain growth in its fundamentals which was clear indication that profitability through consumer satisfaction was the core criteria of company’s policy. Also The company also outmatches its nearest competitors with 24.54% return on investment and 29.16% return on equity.
The cash flow statement was also another indicator of Financial Soundness of the company. Most Importantly, company have maintained a good ratio among Cash Flow from Operations and Cash Flow on Capital Expenditures. Owing to efficient management and reducing Selling and Administrative Expenses to Sales Ratio, Starbucks Corporation has managed to produce a healthy Cash Flow from Operations with a steady growth in numbers every year. While Cash Flow From Operations has increased from $1259 in 2008 to $1750 during 2012, the reducing-constant trend in capital expenditures of the company was another contributor to financial soundness.
Apart from earning high profits driven by increasing revenue, StarBuck surely knows how to keep its shareholders happy. The Earning per Share Ratio has been in increasing trend with EPS being $1.72 during 2012. At present, company has dividend yield of 1.10% while the latest dividend pay out was $ 0.84.
Strong Growth Prospects:
Starbucks with approx 18000 stores in over 60 countries is the most valuable coffee chain globally. The company has been continuously investing to expand its stores. Although as of now, 75% of total share from revenue comes from US Market only, Starbucks has now moved to Asian Countries expecting better consumer response. During 2012, company opened its 700th Store in china under its expansion plans for Asia Pacific Region. Also,during the calendar year of 2012, company in an alliance with Tata Group, India opened their new stores in Delhi and Mumbai under a joint venture of 50:50 Ratio with TATA Group.
Apart from their expansion plans in Asia, company also announced to open new stores in Scandinivia and new retail store locations in SanFransisco and Seattle.
Considering the trend in comparable same store sales growth during past 3 years, it is most likely that their expansion plans will shine their fundamentals among the eateries industry. A healthy comparable sales growth ensures that its top line growth overshadows the overhead costs. Also, the urge to retain and expand customer base through offering ever-changing menu to adapt as per the taste of the customer is a strength and reason behind StarBuck’s Success.
Ratio Summary:
In terms of analyzing the financial statements, the ratios tells us the same and more clear picture of current scenario of Starbucks Corporation. In terms of Solvency Ratios, the Debt/ Total Capital Ratio which is at 9.7% is in line with Eateries Industry and thus on healthy terms.
Further, the Current and Quick Ratios, confirms strong liquidity of the company and assure that company can indeed serve its short-term obligations. Company during 2012 had a healthy current ratio of 1.9 and quick ratio of 1.1.
- Current Ratio: 1.7
- Quick Ratio: 1.1
Activity ratios:
Activity/Asset Management Ratios are also indicating good financial health of the company. To discuss a few, Accounts Receivable Turnover Period is also consistent for the company with the industry level at 12 days(Approx). Also the company is most efficient in managing its inventory as its Cost of Goods Sold tied up in inventory was only 69 days although the Process Period of Inventory has increased over last 4 years of our analysis.
- Total Assets Turnover: 1.7
- Fixed Assets Turnover: 5.3
- Inventory Turnover: 5.1
- Accounts Receivables Turnover: 30.8
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Profitability Analysis
- Return on Assets: 15.05%
- Return on Capital: 21.37%
- Return On Equity: 28.73%
- Net Margin: 10.4%
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Margin Analysis:
- Gross Margin: 57.07%
- EBITDA Margin: 18.83%
- SG & A Margin: 35.29%
Cash Flow Ratios:
Fundamentalal valuation:
Starbucks Corporation- Weakness:
High Reliance on US Market
Starbucks is expanding its business to Asia-Pacific Regions where the core focus is on China and Indian Market, although these expansion decisions could offer an ample amount of estimated benefit to the company however, still the focus is on US Market. In other words, overdependence on US Market could turn out to be major weakness for Starbucks Corporation. Although Starbucks have its retail stores in around 60 countries from US, Europe, Asia, Africa, but the percentage contribution of international stores is less when compared to revenue generated from US Stores. As of 2012, 76.5% of total revenue was generated from stores operating in US, while 23.5% of the revenue was from other countries.
This indicates, strong survival on US Market for success, thus any decline in revenue generated from US Stores or any negative macro estimates on consumer spending could limit available cash flow for expansion in international markets and will also affect any cash related activity.
Sole Reliance on Coffee Business:
As per 2012 Annual Report, Starbucks have 76% of their revenue from coffee sales and even the other 24% is related to coffee. So The entire business is set up on coffee industry. Thus, if coffee industry turns fad, it is possible that StarBucks have to diversify their business. This statement is on the basis of other nearest Competitors of Starbucks Corporation like Dunkin Donuts, who have invested in many industries and not just Donuts.
Also, the Starbucks which is indeed a luxury brand to afford in Coffee Industry, but still people think that Starbucks charge quite high. Also the recent criticism of Starbucks in Chinese Social Media for charging excess and discriminatory prices in Beijing Store when compared to Coffee Prices in Mumbai and London. The report said that a Starbucks Coffee costs double the cost as in Mumbai. Thus these non-consumer friendly approaches may turn out to be ill for Starbucks.
Comparison with Dunkin Donuts:
For many years, Starbucks had earned monopoly profits by dominating coffee chain business. However, now the company is facing some real competition from other old established Dunkin Donuts that has achieved growth through high customer satisfaction and some innovative strategies to incorporate changing consumer taste. Dunkin Donuts which is both a coffee retailer as well as donuts manufacturer has posed threat to market supremacy of Starbucks Corporation.
Fundamental Comparison:
Starbucks
Conclusion:
Although, Starbuck is still the leading coffee chain in the world where its growing revenue and supporting international expansion are strengths of the company. However, Dunkin Donuts which was established way later than Starbucks is indeed a great threat to the company and its ruling place in coffee industry. Although the market capitalization of the latter company is less than Starbucks but in comparison to fundamentals of the company to industry average, Dunkin Donuts is surely leading to its path of aggressive growth and improved customer loyalty.
Bibliography
Dana, M. (2012). CIF Stock Recommendation-2012-SBUX. USA.
Morning Star Analyst Team. (2013). Starbucks Corporation. Retrieved october 25, 2013, from Morning Star: http://tools.morningstar.com/charts/mcharts.aspx?security=SBUX&CountryId=USA
(2013). Starbucks Corporation- Financial and Strategic Analysis . USA: Global Data.
