Comparative Analysis Second Cup and Starbucks Coffee Company

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Company Profile – Second Cup

Second Cup was incepted in 1975 from a small kiosk and has become the largest Canadian coffee café franchisor. The company offers not only whole coffee beans products but has also specialized coffee blends available to its customers. The company owns 360 coffee stores in Canada and a chain of 50 franchised stores internationally (Second Cup, 2009). The company has established a unique open-end fund known Second Cup Income Fund that is listed on the Toronto Stock Exchange which owns the whole of the company’s shares and investors have the opportunity to invest in these stocks through the company’s fully owned subsidiary (Second Cup, 2009).

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Ratio Analysis.

2007 2008 Comments
Current ratio 0.95 0.82 The ratio is less than 1 and it has further declined.
Inventory turnover 137.19 98.52 The value has declined as the company is not able to convert more of its inventory in sales
Days in inventory 2.66 3.70 The value has improved.
Receivable turnover 43.42 45.53 The value has improved.
Average collection period 8.41 8.02 The value has improved.
Debt to total assets 107.10% 109.42% The value has deteriorated as the company is still under high debt compared to its assets.
Free cash flow (2,024) (2,484) The value has deteriorated as the company’s is incurring larger losses.
Profit margin -0.15% -0.81% The value has declined indicating worsening company’s conditions.
Return on Assets -0.29% -1.59% The value has declined indicating worsening company’s conditions.
Return on common shareholders’ equity -8.16% -43.66% The value has declined indicating worsening company’s conditions.

Figures for calculating ratios taken from Second Cup Annual Report (Second Cup, 2008).

Company Profile – Starbucks

Starbucks Coffee Company is one of the leading coffee houses, which offers a large variety of coffee blends, shakes, confectionaries, and other coffee-related accessories to millions of customers every year. The company started its journey in the year 1971 with its first store opening in Seattle (Starbucks, 2008). At present, it operates in 50 states of the US with 7,087 company-operated stores and also a chain of franchises in 43 other countries (Starbucks, 2008). It also has a fully owned subsidiary Tazo Tea Company which specializes in different kinds of teas from around the world (Starbucks, 2009). The company is facing tough financial conditions and has been forced to shut down many of its stores in the US as a result of the current financial crisis.

Ratio Analysis.

2007 2008 Comments
Current ratio 0.79 0.80 The ratio is less than 1 however it improved.
Inventory turnover 5.78 6.71 The value has improved as the company is able to convert more of its inventory in sales
Days in inventory 63.13 54.44 The value has improved but it is considered as poor inventory management for such business.
Receivable turnover 32.69 14.99 The value has deteriorated as the company is not able to convert receivables into sales quicker.
Average collection period 11.17 24.35 The value has worsened as the company is taking more days to collect its receivables.
Debt to total assets 57.26% 56.09% The value has improved but the company is still under high debt compared to its assets.
Free cash flow (75.80) (140.00) The value has deteriorated as the company’s profit decline drastically.
Profit margin 7.15% 3.04% The value has declined indicating worsening company’s conditions.
Return on Assets 12.59% 5.56% The value has declined indicating worsening company’s conditions.
Return on common shareholders’ equity 29.45% 12.67% The value has declined indicating worsening company’s conditions.

Figures for calculating ratios taken from Starbucks Annual Report (Starbucks, 2008).

Comparative Analysis

Both companies are in a similar industry that is involved in offering the best-brewed coffees to millions of customers every day. In recent years both companies have faced difficulties of prevailing weak economic conditions in their respective markets. The effects of economic recession have forced consumers to spend less and save more. Where companies like Starbucks and Second Cup which have enjoyed long periods of profitability and expanding businesses are now faced with the issues of sustainability and inability to generate profits from their operations. In regards to the weakening economic conditions, Starbucks is forced to shut more than one thousand stores in the US that could generate huge unemployment and investment cutbacks. However, it is deemed necessary for companies to restructure their organizations to manage their ailing financial positions. In this analysis paper, the ratio analysis of both companies is carried out using ten important financial ratios. These ratios could be easily categorized for discussion purposes into liquidity, solvency, and profitability ratios. Under the following headings results for both companies are analyzed:

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Liquidity Ratios

These ratios include current ratio, inventory turnover, days in inventory, receivables turnover, and average collection period. The current ratio of both companies remained under 1 which suggests that the companies may have problems when paying off their current obligations from their current assets. Second Cup has much better inventory management as it has been to complete almost 98 times in 2008 (137 times in 2007) its inventory cycle into sales compared to only 6.71 times of Starbucks. Similarly, days in the inventory of Second Cup indicates great efficiency compared to Starbucks which has high days in inventory that are 54 days in 2008 and 64 in 2007 as compared to only 2.66 and 3.70 respectively of Second Cup. Receivables Turnover of Starbucks is poor at almost 15 in 2008 which has deteriorated from 32.69 in 2007 which has caused the collection period to increase to 24.35 days. On the other hand, the collection period of the Second Cup has improved and is only 8 days in 2008.

Solvency Ratio

The ratio included in the analysis is debt to total assets. Both companies have high debts. However, Second Cup has debt exceeding 109% of total assets in 2008 while on the other hand Starbucks debts as 56% of total assets in 2008. This raises major concerns regarding both companies when they are faced with declining sales. The free Cash Flow of both companies is negative and has worsened over the period of 2008-08. This suggests that the companies may be making large investments that may yield better returns in the future. However, in the case of Starbucks, its profits have been depleting and Second Cup has incurred losses.

Profitability Ratios

These ratios include profit margin, return on assets, and returns on common shareholders’ equity. Second Cup has made a loss in 2007 and 2008 which has resulted in negative values for all these three ratios. It could be observed that values of these ratios have worsened for both companies as they are facing depleting sales and difficult economic conditions which are threatening their business sustainability and even their existence.

Reference List

Second Cup. (2009). Our Story. Web.

Second Cup. (2008). Second Cup Annual Report 2008. Toronto: Second Cup.

Second Cup. (2009). Second Cup Royalty Income Fund. Web.

Starbucks. (2008). Annual Report. New York: Starbucks Coffee Company.

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Starbucks. (2008). Company Fact Sheet. Web.

Starbucks. (2008). Company Timeline. Web.

Starbucks. (2009). The Company. Web.

Appendix

The Second Cup Ltd.
Consolidated Statements of Operations and Comprehensive Loss
For the years ended December 27, 2008 and December 29, 2007
(Expressed in thousands of dollars)
2008 2007
System sales – Canada $ 200,979 $ 200,271
Revenue
Royalty revenue $ 16,573 $ 16,270
Revenue from Company-owned cafes 8,868 10,482
Other income 5,483 6,294
30,924 33,046
Expenses
Operating costs and administrative expenses 19,704 20,715
Loss (gain) on disposal of capital assets 10 (181)
Amortization of capital assets 519 503
Amortization of deferred financing charges 142
Writedown of capital assets 230
Interest expense on notes payable 4 2,983
Interest expense on term loan 145
20,467 24,307
10,457 8,739
Interest income 62 123
Investment income (note 8) 201 112
Earnings before income taxes and non-controlling interest 10,720 8,974
Income taxes (recovery)
Current year (67) (216)
Prior year (70)
Future (3) 1,482
Reversal of future income tax liability (11 374)
(140) (10,108)
Earnings before non-controlling interest 10,860 19,082
Non-controlling interest (note 9) 12,486 19,386
Net loss for the year (1,626) (304)
Other comprehensive loss (note 13) (235) (4)
Comprehensive loss $ (1,861) $ (308)
See accompanying notes to consolidated financial statements.
The Second Cup Ltd.
Consolidated Statements of Deficit
For the years ended December 27, 2008 and December 29, 2007
(Expressed in thousands of dollars)
2008 2007
Deficit – Beginning of year $ (11,125) $ (10,772)
Refundable taxes incurred (56) (49)
Loss on disposal of Fund units (note 8) (324)
Net loss for the year (1,626) (304)
Deficit – End of year $ (13,131) $ (11,125)
See accompanying notes to consolidated financial statements.
63
The Second Cup Ltd.
Consolidated Statements of Cash Flows
For the years ended December 27, 2008 and December 29, 2007
(Expressed in thousands of dollars)
2008 2007
Cash provided by (used in)
Operating activities
Net loss for the year $ (1,626) $ (304)
Items not involving cash
Non-controlling interest 12,486 19,386
Amortization 519 645
Writedown of capital assets 230
Future income taxes (3) (9,892)
Loss (gain) on disposal of capital assets 10 (181)
11,616 9,654
Changes in non-cash working capital items (note 16) (1,233) 189
10,383 9,843
Investing activities
Purchase of capital assets (2,059) (1,653)
Proceeds from disposal of capital assets 848 1,296
Proceeds from disposal of Fund units (note 15) 1,412
Purchase of investments in the Fund (note 20) (671)
201 (1,028)
Financing activities
Repayment of notes payable to the Fund (300) (8,871)
Repayment of term loan (note 3) (11 000)
Impact of reorganization (note 3) 11,022
Issuance of common shares in MarksCo (note 20) 67
Issuance of notes payable (note 20) 604
Distributions/dividends paid to non-controlling interest (notes 9 and
15) (11,901) (190)
(12,201) (8,368)
(Decrease) increase in cash during the year (1,617) 447
Cash – Beginning of year 2,743 2,296
Cash – End of year $ 1,126 $ 2,743
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
In millions, except earnings per share
Fiscal Year Ended Sep 28, 2008 Sep 30, 2007 Oct 1, 2006
Net revenues:
Company-operated retail $8,771.90 $7,998.30 $6,583.10
Specialty:
Licensing… 1,171.60 1,026.30 860.6
Foodservice and other 439.5 386.9 343.2
Total specialty… 1,611.10 1,413.20 1,203.80
Total net revenues… 10,383.0 9,411.50 7,786.90
Cost of sales including occupancy costs… 4,645.30 3,999.10 3,178.80
Store operating expenses… 3,745.10 3,215.90 2,687.80
Other operating expenses… 330.1 294.2 253.7
Depreciation and amortization expenses… 549.3 467.2 387.2
General and administrative expenses 456.0 489.2 479.4
Restructuring charges 266.9
Total operating expenses… 9,992.70 8,465.60 6,986.90
Income from equity investees… 113.6 108.0 94.0
Operating income… 503.9 1,053.90 894.0
Interest income and other, net 9.0 40.4 20.7
Interest expense… (53.40) (38.00) (8.40)
Earnings before income taxes… 459.5 1,056.30 906.3
Income taxes… 144.0 383.7 324.8
Earnings before cumulative effect of change in accounting principle.. 315.5 672.6 581.5
Cumulative effect of accounting change for FIN 47, net of taxes… 17.2
Net earnings… $315.50 $672.60 $564.30
Per common share:
Earnings before cumulative effect of change in accounting
principle — basic… $0.43 $0.90 $0.76
Cumulative effect of accounting change for FIN 47, net of
taxes 0.02
Net earnings — basic… $0.43 $0.90 $0.74
Earnings before cumulative effect of change in accounting
principle — diluted… $0.43 $0.87 $0.73
Cumulative effect of accounting change for FIN 47, net of
taxes 0.02
Net earnings — diluted… $0.43 $0.87 $0.71
Weighted average shares outstanding:
Basic… 731.5 749.8 766.1
Diluted 741.7 770.1 792.6
See Notes to Consolidated Financial Statements.
42
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
In millions, except per share data
Sep 28, Sep 30,
Fiscal Year Ended 2008 2007
ASSETS
Current assets:
Cash and cash equivalents… $269.80 $281.30
Short-term investments — available-for-sale securities… 3.0 83.8
Short-term investments — trading securities 49.5 73.6
Accounts receivable, net… 329.5 287.9
Inventories… 692.8 691.7
Prepaid expenses and other current assets… 169.2 148.8
Deferred income taxes, net… 234.2 129.4
Total current assets… 1,748.0 1,696.50
Long-term investments — available-for-sale securities… 71.4 21.0
Equity and cost investments… 302.6 258.9
Property, plant and equipment, net… 2,956.40 2,890.40
Other assets… 261.1 219.4
Other intangible assets… 66.6 42.1
Goodwill… 266.5 215.6
TOTAL ASSETS… $5,672.60 $5,343.90
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Commercial paper and short-term borrowings… $713.00 $710.30
Accounts payable… 324.9 390.8
Accrued compensation and related costs… 253.6 292.4
Accrued occupancy costs… 136.1 74.6
Accrued taxes… 76.1 92.5
Insurance reserves… 152.5 137.0
Other accrued expenses… 164.4 160.3
Deferred revenue… 368.4 296.9
Current portion of long-term debt… 0.7 0.8
Total current liabilities… 2,189.70 2,155.60
Long-term debt… 549.6 550.1
Other long-term liabilities 442.4 354.1
Total liabilities… 3,181.70 3,059.80
Shareholders’ equity:
Common stock ($0.001 par value) — authorized, 1,200.0 shares; issued and
outstanding, 735.5 and 738.3 shares, respectively (includes 3.4 common stock
units in both periods)… 0.7 0.7
Other additional paid-in-capital… 39.4 39.4
Retained earnings… 2,402.40 2,189.40
Accumulated other comprehensive income… 48.4 54.6
Total shareholders’ equity… 2,490.90 2,284.10
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY… $5,672.60 $5,343.90
See Notes to Consolidated Financial Statements.
43
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions
Sep 28, Sep 30, Oct 1,
Fiscal Year Ended 2008 2007 2006
OPERATING ACTIVITIES:
Net earnings $315.50 $672.60 $564.30
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Cumulative effect of accounting change for FIN 47, net of taxes… 17.2
Depreciation and amortization… 604.5 491.2 412.6
Provision for impairments and asset disposals… 325.0 26.0 19.6
Deferred income taxes, net… (117.10) (37.30) (84.30)
Equity in income of investees… (61.30) (65.70) (60.60)
Distributions of income from equity investees… 52.6 65.9 49.2
Stock-based compensation… 75.0 103.9 105.7
Tax benefit from exercise of stock options… 3.8 7.7 1.3
Excess tax benefit from exercise of stock options… (14.70) (93.10) (117.40)
Other… (0.10) 0.7 2.0
Cash provided/(used) by changes in operating assets and liabilities:
Inventories… (0.60) (48.60) (85.50)
Accounts payable… (63.90) 36.1 105.0
Accrued taxes… 7.3 86.4 132.7
Deferred revenue 72.4 63.2 56.6
Other operating assets and liabilities 60.3 22.2 13.2
Net cash provided by operating activities… 1,258.70 1,331.20 1,131.60
INVESTING ACTIVITIES:
Purchase of available-for-sale securities… (71.80) (237.40) (639.20)
Maturity of available-for-sale securities… 20.0 178.2 269.1
Sale of available-for-sale securities… 75.9 47.5 431.2
Acquisitions, net of cash acquired… (74.20) (53.30) (91.70)
Net purchases of equity, other investments and other assets (52.00) (56.60) (39.20)
Net additions to property, plant and equipment… (984.50) (1,080.30) (771.20)
Net cash used by investing activities… (1,086.60) (1,201.90) (841.00)
FINANCING ACTIVITIES:
Repayments of commercial paper… (66,068.00) (16,600.90)
Proceeds from issuance of commercial paper… 65,770.80 17,311.10
Repayments of short-term borrowings… (228.80) (1,470.00) (993.10)
Proceeds from short-term borrowings… 528.2 770.0 1,416.10
Proceeds from issuance of common stock… 112.3 176.9 159.2
Excess tax benefit from exercise of stock options… 14.7 93.1 117.4
Principal payments on long-term debt… (0.60) (0.80) (0.90)
Proceeds from issuance of long-term debt… 549.0
Repurchase of common stock… (311.40) (996.80) (854.00)
Other… (1.70) (3.50)
Net cash used by financing activities… (184.50) (171.90) (155.30)
Effect of exchange rate changes on cash and cash equivalents 0.9 11.3 3.5
Net increase/(decrease) in cash and cash equivalents… (11.50) (31.30) 138.8
CASH AND CASH EQUIVALENTS:
Beginning of period… 281.3 312.6 173.8
End of the period… $269.80 $281.30 $312.60
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of capitalized interest… $52.70 $35.30 $10.60
Income taxes… $259.50 $342.20 $274.10

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