LaSalle University Starbucks Executive Summary Analysis Executive Summary and Conclusion -Summary of the company’s financial performance, including streng

LaSalle University Starbucks Executive Summary Analysis Executive Summary and Conclusion

-Summary of the company’s financial performance, including strengths and weaknesses

-Recommendations for improvement of the operation

Conclusion should be a very brief summary of everything, including the financial strengths and weaknesses of the company and any recommendations for how to improve operation

Aside from that, a brief analysis of how Dunkin and Starbucks’s ratios compare to one another has to be done. (just basically say which one is doing better and such) 1
Financial Issues in Tourism and Hospitality Group Project
Group 3 – Starbucks
Sandra Levant, Tim Avery, Tiffanie Nguyen, and Isaiah Cofield
Industry Analysis
2
Starbucks is an American coffee company. It began in 1971 as a small coffee shop
located in the Pike Place Market of Seattle, Washington. In 1981, Howard Shultz discovered the
small shop and was drawn in after his first cup of coffee. He spent some time travelling
throughout Italy exploring various types of coffee and by 1987, Shultz purchased the Starbucks.
Since then, the company has grown to become one of the world’s leading brands in serving,
selling, marketing, and coffee roaster. The company serves a variety of beverages, food items,
and merchandise, though it specializes in its premium coffee. Today, There are over 20,000
Starbucks locations worldwide. Stores can be found in America, Canada, Latin America, China,
Japan, Asia Pacific, Europe, the Middle East, and Africa.Starbucks’s mission is to inspire and
nurture the human spirit – one person, one cup and one neighborhood at a time. It is evident that
they follow this full heartedly through their ability to reach customer bases worldwide and the
depth to which their products are enjoyed.
Based upon the company’s dominance in the coffee and quick service industries, it can
be inferred that Starbucks will continue to thrive in its current markets. However, it is important
to examine the company’s recent past to confirm this. In the past three years, Starbucks has
experienced steady growth in its net revenues. As found on the income statements, in 2017 the
company made $22,386,600 in net revenue. In 2018, this number grew to $24,719,500, and by
2019, the company’s net revenue was $26,508,600. Starbucks is increasing its net revenues each
year by over two million dollars, highlighting the company’s steady growth before expenses are
factored in. The company’s total operating expenses for these respective years were $18,643,500
in 2017, $21,137,400 in 2018, and $22,728,700 in 2019. Although expenses grew each year,
revenues did as well. When the expenses are considered, the company is operating with yearly
income of about $4 million. This shows that Starbucks is consistently making the same,
substantial amount of money.
In order to manage its finances and costs, Starbucks utilizes a unique business approach.
The company’s biggest expense is its coffee beans, but specifically the price per pound of coffee
beans. The demand for coffee beans for the Starbucks company is so high that they must
purchase them from multiple continents. However, to control these costs, Starbucks purchases
the weakest, most popular coffee bean known as the Arabica bean. Not only does this cut their
costs down, but the Arabica bean is easier to mix with the Starbucks company’s 30 different
coffee blends sold. Starbucks also recently revamped its rewards program. This has proved to
benefit them greatly and keeps customers coming in, making for repeat business. Starbucks
typically has higher prices for its drinks. The changes to the rewards program allow customers to
receive more incentives for earning points, but has also made customers have to earn more points
to earn a free drink. This helps costs in two ways. First, it gives the company an opportunity to
give out things that aren’t necessarily free products, cutting down their losses. The amount of
opportunities for ways to redeem points also keeps customers coming in to purchase drinks and
more. Though this company has created a unique way to maintain the bulk of its costs,
Starbucks is currently faced with the key challenge of figuring out how to operate within food
service during the COVID-19 pandemic. Starbucks has had to temporarily close many of its store
3
locations, which means that the company is experiencing a huge decrease in sales. Further, there
is an incredible amount of uncertainty surrounding if and when the companies that make up the
coffee and quick service food industry will be able to reopen.
Horizontal Analysis and Interpretation
For each horizontal analysis, data from the 2017, 2018, and 2019 financial statements
have been utilized. The financial years ended on September 30 and for the calculations, 2017
was used as the base year. It is important to highlight that over the past three years, Starbucks has
experienced solid growth. In 2019, Starbucks opened over 300 new stores, which contributed to
increases in both revenue and expenses. However, it has led to more growth in revenue above all.
On top of this, the Starbucks company has also taken great steps to better manage their expenses.
Should this trend continue, the Starbucks Company will continue to experience a steady net
income that allows them to make a solid profit overall. Starbucks also plans to keep opening new
stores.
Income
Statement
2017
2018
2019
Change in $
(2018-2017)
Change in $
(2019-2017)
%
change
’18
%
change
’19
Total
Revenue
22,386
,800
24,719,
500
26,508,
600
2,332,700
4,121,800
10.42%
18.41%
Cost of
Revenue
15,531
,500
17,367,
700
19,020,
500
1,836,200
3,489,000
11.82%
22.46%
Gross Profit
6,855,
300
7,351,8
00
7,488,1
00
496,500
632,800
7.24%
9.23%
Operating
Expenses
2,958,
500
3,545,3
00
3,572,4
00
586,800
613,900
19.83%
20.75%
Operating
Income
3,896,
800
3,806,5
00
3,915,7
00
-90,300
18,900
-2.32%
0.49%
Interest
Expense
92,500
170,30
0
331,000 77,800
238,500
84.11%
257.84%
Total other
income/expe
nse net
237,90
0
1,952,4
00
785,000 1,714,500
547,100
720.68%
229.97%
Income
before tax
4,317,
500
5,780,0
00
4,466,2
00
148,700
33.87%
3.44%
1,462,500
4
Income Tax
Expense
1,432,
600
1,262,0
00
871,600 -170,600
-561,000
-11.91%
-39.16%
Income from 2,884,
continuing
900
operations
4,518,0
00
3,594,6
00
1,633,100
709,700
56.61%
24.60%
Net Income
4,518,3
00
3,599,2
00
1,633,600
714,500
56.63%
24.77%
2,884,
700
The horizontal analysis above compares the income statements for years 2017-2019. This
statement examines the revenues and expenses of the Starbucks company during these years and
how they compare to one another. At a first glance, it is evident that there has been an increase in
total revenues for Starbucks. However, the company has experienced moderate increases in
operating expenses. Also, there has been fluctuation in the amount of income made from
continuing operations, the income before taxes, and the total other income/expenses. Despite the
increases in expenses, the most telling factor of the income statement and the horizontal analysis
of it is that the total revenue has steadily increased yearly by around $2 million. This highlights
that under the current business approach, the Starbucks Company is steadily growing.
Balance
Sheet
2017
2018
2019
Change in
$ (20182017)
Change in $
(2019-2017)
% Change
’18
% Change ’19
Assets
14,365,600
24,156,40
0
19,219,600
9,790,800
4,854,000
68.15%
33.79%
Liabilities
8,908,600
22,980,60
0
25,450,600
14,072,000
16,542,000
157.96%
185.69%
Common
Stock
1,400
1,300
1,200
-100
-200
-7.14%
-14.29%
Retained
Earnings
5,563,200
1,457,400
-5,771,200
-4,105,800
-11,334,400
-73.80%
-203.74%
other
comprehen
sive income
-155,600
-330,300
-503,300
-174,700
-347,700
112.28%
223.46%
5
Total
Stockholde
rs’ Equity
5,450,100
1,169,500
-6,232,200
-4,280,600
-11,682,300
-78.54%
-214.35%
Total
liabilities
and
Stockholde
rs’ equity
14,365,600
24,156,40
0
19,219,600
9,790,800
4,854,000
68.15%
33.79%
Based on the horizontal analysis of the balance sheets for the years 2017-2019, it can be
inferred that Starbucks has experienced tremendous changes in terms of its assets. Along with
this, the company has had extreme increases to its liabilities as well. This could be caused by a
few different things, but is most likely a result of the company’s choice to continue opening new
stores. For each location opened, Starbucks creates more expenses and properties that it could
lose if the company were to go under. The company also took a hit to its retained earnings, which
means that it didn’t keep much money, specifically in 2019. Though they experienced a decrease
in how much money they retained overall, the company still retained profits, which indicates that
it is operating well.
Cash Flows
2017
2018
2019
$
Change
18
$
change
2019
%
change
18
Net Income
%
change
19
2,884,70
0
4,518,30
0
3,599,200
1,633,60
0
714,500
56.63% 24.77%
Depreciation/Amorti
zation
1,067,10
0
1,305,90
0
1,449,300
238,800
382,200
22.38% 35.82%
Deferred income tax
95,100
714,900
1,495,400
619,800
1,590,50
0
651.74
%
stock based
compensation
176,000
250,300
308,000
74,300
132,000
42.22% 75.00%
change in working
capital
89,700
6,913,70
0
1,648,700
6,824,00
0
1,559,00
0
7607.58 1738.02
%
%
accounts receivable
-96,800
131,000
-197,700
227,800
-100,900
235.33
%
1672.45
%
104.24
%
6
inventory
14,000
-41,200
-173,000
-55,200
-187,000
394.29
%
1335.71
%
accounts payable
46,400
391,600
31,900
345,200
-14,500
743.97
%
-31.25%
other working capital 2,654,90
0
9,961,40
0
3,240,400
7,306,50
0
585,500
275.21
%
22.05%
other non cash items
-24,600
1,287,40
0
187,900
1,262,80
0
212,500
5133.33 %
863.82
%
net cash from
operating activities
4,174,30
0
11,937,8
00
5,047,000
7,763,50
0
872,700
185.98
%
Investments in
property, plant, and
equipment
1,519,40
0
1,976,40
0
1,806,600
-457,000
-287,200
30.08% 18.90%
Acquisitions
0
1,311,30
0
0
1,311,30
0
0
0.00%
purchases of
investments
-674,400 -191,900
-190,400
482,500
484,000
-71.77%
71.55%
sales/maturities of
investments
1,204,10
0
504,300
358,100
-699,800
-846,000
-70.26%
58.12%
other investing
activities
54,300
5,600
-56,200
-48,700
-110,500
89.69% 203.50
%
net cash used for
investing activities
-850,000 2,361,50
0
1,010,800
1,511,50
0
1,860,80
0
177.82
%
218.92
%
debt repayment
-400,000 0
-350,000
400,000
50,000
100.00
%
-12.50%
common stock issued
150,800
409,800
3,100
259,000
2.06%
171.75
%
153,900
20.91%
0.00%
7
common stock
repurchased
2,042,50
0
7,133,50
0
10,222,30
0
5,091,00
0
8,179,80
0
249.25
%
400.48
%
dividends paid
1,450,40
0
1,743,40
0
1,761,300
-293,000
-310,900
20.20% 21.44%
other financing
activities
-9,700
-103,900
-129,100
-94,200
-119,400
971.13
%
1230.93
%
net cash used for
financing activities
3,001,60
0
3,242,80
0
10,056,90
0
-241,200
7,055,30
0
8.04%
235.05
%
net change in cash
333,500
6,294,00
0
6,069,700
5,960,50
0
6,403,20
0
1787.26 %
1920.00
%
cash at beginning of
period
2,128,80
0
2,462,30
0
8,756,300
333,500
6,627,50
0
15.67% 311.33
%
cash at end of period
2,462,30
0
8,756,30
0
2,686,600
6,294,00
0
224,300
255.61
%
9.11%
free cash flow
2,654,90
0
9,961,40
0
3,240,400
7,306,50
0
585,500
275.21
%
22.05%
As indicated by the analysis of the statement of cash flows, Starbucks experienced a steep
decrease in its cash from operating activities. This highlights that the company was making less
money off of things like receipts from sales of goods and services, interest and tax payments,
payments made to suppliers, salaries of wage employees, and more. Essentially, all of the
expenses it takes to operate the business brought Starbucks less net cash in 2019 than it did in
2018. There were also changes in the financing activities on the cash flow statement, which
could indicate that there were more investors with interest in Starbucks. Overall, at the end of
each year from 2017-2019, there was a positive, free cash flow. This means that the company is
generally producing income from its core operations each year. This is a good sign for the
strength of the company financially, and an indication that Starbucks will continue to be a strong
business moving forward.
8
Financial Ratio Analysis and Interpretation
Ratios
SBUX
SBUX
% Change
SBUX
% Change
Year
2017
2018 2018/2017
2019 2019/2018
Current
Ratio
1.25
2.20
75.59
0.92
1.17
Quick Ratio
0.64
1.57
146.63
0.45
0.50
Debt to
Equity
1.63
19.54
1,097.22
-4.08
-96.51
Total Debt
Ratio
0.62
0.95
-34.81
1.32
-0.49
Equity
Multiplier
2.63
20.54
680.42
-3.08
-72.88
Asset
Turnover
1.56
1.28
-17.81
1.22
0.07
0.1289
0.1682
30.56
0.1358
0.00
ROA
0.20
0.22
7.51
0.17
0.01
DuPont ROE
0.53
4.44
-370,302.91
-0.51
-0.02
Profit
Margin
The current ratio measures Starbucks’s liquidity, or ability to repay short term obligations
due within one year. This ratio must be greater than 1 in order to be in a comfortable position to
pay off these short term debts. With this in mind, in 2017 and 2018, Starbucks was in excellent
shape to pay off its short term obligations. However, in 2019 their current ratio was below 1.
This indicates that there were more short term debts or current liabilities in 2019 than assets,
making it more challenging for the company to comfortably pay off its short term debts.
However, it is important to note that the current ratio in 2019 was 0.92, which is not significantly
below the goal of 1. This means that Starbucks is in a good position to recover from this moving
forward. The quick ratio specifically measures a company’s liquidity in terms of its quick assets.
This number should also be greater than 1 in order to be financially comfortable with paying off
current liabilities. As shown in the table above, the only year that Starbucks had a solid quick
ratio was 2018. In both 2017 and 2019, the quick ratio was well below 1. This implies that
9
during both of these years, Starbucks did not have enough quick assets, such as cash, accounts
receivable, and marketable securities, to pay back its then current liabilities.
Debt to Equity begins to put together the picture of the company’s financial leverage and
long-term financial health by showing how the business is financing their operations. This
information is useful to determine if the Stockholders can pay back the creditors in the event that
the business begins to fail. The Debt Ratio shows us how the company’s liabilities compare to
their assets. Equity Multiplier is not only a good measure of how a company finances its
operations, but it is crucial in determining the Dupont Expansion of Return on Equity which
gives us a strong sense of a company’s financial levels. Since all the Debt to Equity is -4.08 And
the total Debt Ratio is 1.32, we can tell that Starbucks is increasing the amount of debt that they
are using to finance the company compared to stockholders equity. This means that the company
is becoming less financially stable when you compare credits to debits but that can be because of
the current financial climate. Starbucks being overall financially okay this would be a good time
to buy in for a lower price for investors.
The last few financial ratios that have been examined for Starbucks include the asset
turnover ratio, profit margin, ROA, and the DuPont ROE. The asset turnover ratio looks
specifically at how efficiently a company can use their assets, or what they have, to produce
sales. The higher this number is, the more efficiently a company utilizes its assets. For Starbucks,
the company has had solid asset turnover ratios from 2017 to 2019. This indicates that Starbucks
knows how to use what it already has and owns in order to make a profit for the company. This
method has and will continue to serve the company well in the future. The profit margin looks at
how well the management of a company can generate sales in terms of net income and total
revenue. This percentage ratio has remained relatively consistent for Starbucks, ranging between
12 and 16 percent during these years. This indicates that management has a relatively stable hold
on how to manage what is in its control. When examining the company’s ROA, or return on
assets, this shows how capable the things that Starbucks owns are of creating revenue. Overall,
the return on assets has also been consistent, indicating once more that Starbucks has a steady
understanding of its assets and how to best manage them. Lastly, the company’s ROE, or return
on equity indicates how well a company uses what is invested into it to generate revenue. For
Starbucks, this number has definitely fluctuated a great deal. This could indicate that from 20172019, less investors took interest in putting money into Starbucks. Next, we will look at how
Starbucks compares financially to one of its leading competitors, Dunkin.
Ratios
SBUX
DNKN
Year
2019
2019
Current
Ratio
0.92
1.56
Quick Ratio
0.45
1.07
10
Debt to
Equity
-4.08
-7.67
Total Debt
Ratio
1.32
0.12
Equity
Multiplier
-3.08
-66.35
Asset
Turnover
1.22
0.07
0.1358
0.18
0.17
0.01
-0.51
-0.80
Profit
Margin
ROA
DuPont ROE
Starbucks and Dunkin’ Brands Group are two of the largest coffee chains in the United
States. Both companies offer similar options and both have similar overall strategies.
Nonetheless, there are key differences in their companies related to scale, store ownership, and
branding .Despite being founded 20 years after Dunkin’, Starbucks grew aggressively and is a
substantially larger company. Starbucks has a large footprint, with some 28,218 locations
worldwide, compared to Dunkin’ which has only a little over 20,500 locations across the globe.
At the national level, Starbucks leads with about 14,000 locations compared to the nearly
9,200 Dunkin’ Donuts locations in the U.S. Dunkin’ Donuts has only 3,397 stores that exist
outside the U.S. “Dunkin’ Donuts international revenue in 2018 contributed less than 4 percent of
total sales, while roughly 30 percent of Starbucks’ consolidated net revenues in the same period
were attributed to markets outside of the Americas.” (Investopedia.com, 2019)
Analysis:
Dupont Expansion: Starbucks ROE looks very different from both Dunkin’s. Dunkin’s very
high ROE is attributable to their very low stockholders equity.. Starbucks ROE on the other
hand, looks healthy and stable.
Executive Summary and Conclusion
Overall, it is evident that Starbucks is a strong and stable company.

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