Final Financial Analysis Project

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Apr 3, 2024

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Final Financial Analysis Project: Starbucks Richard Cotton Saint Leo University Financial Statement Analysis ACC-498-OL01 Professor Paula Beiser
Introduction The company I have chosen for my financial analysis project is Starbucks corporation, they are a retail coffee business that has operations all around the word. Starbucks was founded in 1971 in Seattle, Washington but has expanded outside of the U.S. all across Europe, East Asia, West Asia and Africa (Farr, 2017)! Their main source of revenue is their coffee retail sales; however, it is not their only stream of revenue these days. As Starbucks began selling food items, prepackaged snacks and retail merchandise in 2008 to great success prior to the 2008 housing crash where the items were briefly removed from the menu (Friedman, 2022). Other than that Starbucks also licenses its trademarks to various in store retailors to make pre packaged coffee bean sales, operate non-corporate stores and merchandise. With all that in mind it sure is a wide swath of irons to have in the fire for Starbucks and understandably makes them the biggest dog in the coffee retail business. But that does not mean they are without competition; their largest competitor is Dunkin’ Donuts followed behind McDonalds’ McCafé breakfast brand. Below I will delve deeper into Starbucks as a business and ultimately how they compare to the retail coffee market at large.
Starbucks Stock Starbucks stock price has maintained a relatively stable rise and fall pattern following the pandemic that began in 2020. As covid impacted their coffee retail sales during the beginning but their at home coffee sales did ramp up to compensate some during 2021. With revenue falling from almost $27 billion in 2019 to just over $23 billion in 2020, before taking a massive jump up to $30.5 billion in 2021 and finally another jump up to $32.25 billion in 2022 (Market Cap, 2023). During that we saw COGS for each year increase 4% YOY from 2020 to 2021 and total operating expenses increased by 1% YOY. From 2021 to 2022 expenses increased by 8% for COGS and operating expenses increased by 11%. With those increased expenses in mind the gross margin has also increased to match exceed pace set by increased expenses by a staggering 14% between 2020 and 2021. Then from 2021 to 2022 gross margin only increased by 8% itself
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which led to an overall reduction in Net income. Which would match the average YOY cost of goods increases but not cover the increase in the cost for operating, leading to a slight decline in net income that year despite overall revenue increasing. Which in my mind even though 2022 could be viewed as a year a step was taken back, I think Starbucks is marching towards a positive trend and is an overall healthy business. With that trend in mind one of the greater improvements to their balance sheet that Starbucks has made is the reduction of their interest expense YOY. Back in 2018 they had $175 million in interest expense which took a massive 94% increase in 2019 to $340 million as a result of global expansion efforts (WSJ, 2023). Which saw another large increase of 35% to $458 million in 2020 as a result of the pandemic greatly reducing business revenue. Finally seeing a small jump of 8.5% to $497 million before evening itself out at $497 again in 2022. Which shows that the business is remaining healthy by keeping their interest liability stable through the year of 2022 and not acquiring new debt. Below is a table of net income that shows it growing between 2020 and 2021 but reducing during the year of 2022 due to some business expenses increasing. While there is a slight decrease in the trend of income in 2022, I still believe based on the graph below that Starbucks outlook is healthy and thriving!
Balance Sheet Starbucks’ total assets fluctuate between the year of 2020 to 2022 starting with an increase from $29 billion to $31 billion in 2021 total assets before falling down to $28 billion in 2022. This shows a flat 6% increase from 2020 to 2021 then another sharp change but this time a decrease of 9.5% in total assets. The assets with the highest level of impact into these decreases were the rise and all of the current assets between 2020 and 2022 which were Starbucks’ cash equivalents and short-term investments seeing the most overall activity. With the assets fluctuating by a moderate percentage the liabilities have actually steadily declined YOY between 2020 and 2022. Declining from $37 billion in 2020 to $36.5 billion in 2021 and staying roughly the same in 2020 at $36.5 billion again. Showing a 1% drop in liabilities and then a 0% change between the years. Interestingly, current liabilities have increased each year by roughly 11% but are 1/3 rd the size of long-term liabilities currently on the Starbucks’ balance sheet. Whereas the long-term liabilities on Starbucks’ balance sheet have dropped by around 4% each year. So, each year they have evened out or reduced slightly based on the raw numbers of each category. Which I find interesting that liabilities can be increasing and decreasing in opposite directions but end up
essentially netting out their change in the total liabilities line. Finally, for the balance sheet is the stockholders’ equity for Starbucks, which as certainly been a bit of an eye sore it seems over the past 3 years. In part due to heavy expansion requiring the taking of long-term liabilities and the hit to revenue during the pandemic. Seeing Starbucks’ 2020 stockholders’ equity at -$7.8 billion rise to only -$5.3 billion before once again falling down to $8.7 billion as pictured below. This steady decrease in Stockholders’ equity is due to Starbucks’ liabilities increasing at a greater rate than their assets. As in the long term they intend for these liabilities that are being added to increase the overall health of the business in the short-term when the liability is taken on it negatively effects the balance sheet. Overall, in regard to the balance sheet I think Starbucks’ balance sheet reads as a reasonable one for a large corporate entity with a large market cap. Currently it has a large number of assets but those are counterbalanced by the liabilities that have been taken on to acquire them. Meaning that in the near future as Starbucks continues to stabilize their business their assets will begin to far outpace their liabilities.
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Statement of Cash Flows Starbucks’ experienced a considerable change in their cash flows over the period from 2020 to 2022, seeing massive increase in from 2020 to 2021 in cash generated by operating activities. Growing from $1.6 billion dollars to $6 billion dollars generated by operating activities which is nearly a 400% increase! They did experience a bit of a rubber band effect with cash generated by operating activities reducing to only $4.4 billion in 2022 which is a 36% decrease but it is still a considerable increase from 2020. With the increase in cash provided by the operating activities unfortunately investing activities and financing activities did not maintain pace. Investing activities generated positive net cash in 2020 of $1.6 billion but fell to using $319.5 million instead in 2021 and an even greater drop to using $2.15 billion in cash in 2022. This was a result of Starbucks taking on significantly more in current liabilities during those periods and acquiring more long-term investments. Resulting in more cash being invested in 2021 and 2022 than was generate in revenue from their prior investments. Lastly for the cash flows was the cash provided for financing activities which followed suit with investing activities seeing a decline. Financing activities generated $1.7 billion in cash for 2020 but used $3.65 in cash in 2021 and used an even greater amount of cash in $5.6 billion in 2022. The result in this drop was from Starbucks’ beginning more aggressive repayment on their short-term and long-term debt while also purchasing back more of their equity than it issued in those years. The below graph highlights the overall activity found within the cash flows on Starbucks’ financial statements.
Altogether, Starbucks’ operating activities provide them a solid cushion to be able to pursue investing and financing activities that seek to grow the business for the future. Especially in regard to their financing activities that they have been utilizing cash to pay debt back aggressively. Starbucks and its Competitors in the Industry
Starbucks exists at the top of its industry by market cap, it does however have some issues on the liquidity and profitability front when it compares to its competitors. Starbucks currently boasts a 77% current ratio which means that currently it does not have the ability to pay 100% of its short-term obligations which is generally considered good. Where as its competitors and the industry average all boast an over 100% current ratio. Additionally, Starbucks, main competitors have a more favorable acid-test ratio. However, Starbucks at least comparatively to its 2 main competitors has a reasonable current cash debt ratio of 48% which is slightly worse than Dunkin’s but worse than McDonalds. With the liquidity ratios in mind Starbucks does begin to pull ahead of the pack when it comes to profitability and efficiency. Boasting a comparatively favorable return on common equity over Dunkin and McDonalds at 11.7% where as the other two have a negative return on common equity. Starbucks’ also boasts a 474% inventory ratio which is considerably higher than each of its competitors in the industry as well as an over 100% asset turnover ratio. Showing that as time continues and Starbucks’ continues to dominate, they can turnover their inventory incredibly consistently and at higher and higher profits. Conclusion Starbucks is a company I’m glad I got an opportunity to delve into as they are an incredibly large part of the average American’s day to day life. Especially in my life as my girlfriend goes to Starbucks nearly everyday and her mother is the manager of a Starbucks in Maryland. What I have learned over the course of this project is I do believe based on their financial statements that Starbucks would be a sound investment in the future. Especially as they continue to expand further into the global market!
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References: Farr, S. (2017, February 15). Zev Siegl, Jerry Baldwin, and Gordon Bowker, ca. 1971 . Starbucks: The Early Years. Retrieved May 7, 2023, from https://www.historylink.org/file/20292 Friedman, S. (2022, December 18). When did Starbucks begin selling food? Tasting Table. Retrieved May 7, 2023, from https://www.tastingtable.com/1136800/when-did-starbucks- begin-selling-food/ Market Cap. (2023). Starbucks (SBUX) - revenue . CompaniesMarketCap.com - companies ranked by market capitalization. Retrieved May 7, 2023, from https://companiesmarketcap.com/starbucks/revenue/ Starbucks. (2023). Financial Data . Starbucks Corporation - Financial Data - SEC Filings - SEC Filings Details. Retrieved May 7, 2023, from https://investor.starbucks.com/financial- data/sec-filings/sec-filings-details/default.aspx?FilingId=16213124 WSJ. (2023). Starbucks Corp. Wall Street Journal Markets. The Wall Street Journal. Retrieved May 7, 2023, from https://www.wsj.com/market-data/quotes/SBUX/financials/annual/income-statement