A thorough analysis of the financial state of the company is one of the components of commercial success. Analysis of activities allows the managing lead to assess the current position of the company, take into account risks and favorable factors, and draw up an adequate forecast for the future. Financial analysis of an enterprise is an effective tool for assessing constraints that the business might experience. Understanding the constraints can help the company create an action plan to increase the efficiency of the business.
Starbucks is one of the world’s leading chain coffee shops. Its history dates back to 1971 in Seattle with the opening of a small store, which offered selected coffee varieties of its own roast. Today, almost 33 thousand coffee shops under the Starbucks brand have been opened in 75 countries around the world (Starbucks Reports Q2 Fiscal, 2021 Results). This paper aims to provide a financial analysis of the Starbucks company.
Horizontal and Vertical Trend Analysis
In the process of horizontal analysis, the data available at the reporting date is compared with similar data for the past period. For example, equity might be compared at the beginnings and ends of the previous 2-3 years. In the process, not only the growth rate of individual articles is monitored, but also trends of change are identified.
The balance sheet indicates that there was a slight drop in the total revenue of Starbucks between 2019 and 2020 – $26,5 billion in 2019 against $24,7 billion in 2020. Moreover, the cost of revenues has also dropped since 2019, and significantly: from 8% in 2019 to -2% in 2020. Gross profits have also experienced a slight decrease during this time period, which indicates that the business has not yet bounced back from the crisis of pandemics.
Subsequently, in response to the decrease in profits and revenues, expenses have grown: for example, non-recurring expenditures surged to 105% in 2020 in comparison to -35% of 2019. The operating expenses, however, have dropped: from 8% in 2019 to -2% in 2020. This, perhaps, is due to the fact that the businesses have been actively shifting towards online operations since the beginning of the pandemic. All in all, net income since 2019 has increased: $4,5 billion in 2020 against $3,6 billion in 2019, which allows concluding that the business, although not without struggles, managed to recover and make profits.
The vertical type of analysis is based on the fact that the totals – as of the reporting date – are taken equal to 100%. Further, individual parts are expressed as percentages of the whole. In other words, in the process of such an analysis, the specific weight of each component in the overall result is clarified.
Per vertical analysis, it is clear that the costs of revenues were the highest in 2020 and comprised 33% against 32% in 2019 and 2018. Still, the gross profits of 2020 were lower as opposed to 2019 and 2018, although only by one percent. Perhaps, this can be tied to the recurring outbreaks of COVID-19 that happened throughout the year. The administrative and general selling costs, as well as non-recurring expenses, remained stable and without change in the period from 2018 to 2020, which indicates that the business did not experience much shock. Still, the operational expenses were the highest in 2020 – 95% against 86% in 2019 and 2018 – and subsequently, the operational income/loss was the lowest. Earnings before interest and taxes have also shown a decline since 2018, persisting through 2019 into 2020. Overall, 2018 presented the highest rate of net income of $4,5 billion, bypassing 2019 and 2020 by a significant amount.
The inventory valuation method that Starbucks uses is the LIFO method – “Last-In, First-Out.” This approach assumes that the goods that have been produced most recently should be sold first. The use of the LIFO method helps Starbucks ensure that the revenue level remains stable in the background of growing prices. The overview of the company’s financial reports demonstrates that the company maintains a relatively stable level of revenues with total net revenues of $13,417.5 in March 2021 and $13,092.8 in March 2020 (Starbucks Corporation, 2021). Another important advantage of Starbucks’ usage of the LIFO inventory valuation method is its positive influence on tax payments.
Indeed, when using LIFO, Starbucks is capable of reducing taxes. The financial reports’ data analysis indicates that income tax remains on approximately the same level, with $416.5 in March 2021 and $324.0 in March 2020 (Starbucks Corporation, 2021). Thus, LIFO allows Starbucks to regulate its inventory management in an efficient manner with benefits for the finances in a long-term perspective on the background of a hectic economic situation with rising prices.
Ratio Analysis
Starbucks remains one of the industry leaders in the United States, especially in terms of the number of outlets. According to the Scrapehero website (2021), there are currently 15,155 shops in the United States. The closest competitor is Dunkin Donuts, which has about 9.3 thousand establishments (Scrapehero, 2021). JAB-owned brands such as Pret-a-Manger, Peet’s Coffee, and Caribou Coffee are also putting significant pressure on Starbucks. The business model of Starbucks is rather complicated – along with branded coffee shops, there is also a franchise that generates income in the form of royalty, which brings the main profit to the company. Therefore, for the stable growth of the company’s financial performance, several factors are important at once.
The first factor of the company’s sustainable liquidity, solvency, and profitability is the growth of the working capital. In general, the company’s financial state is quite stable – although there was a drastic decrease of working capital in 2019, in 2020, Starbucks has successfully recovered, showing a significant rise. The reasons behind such dynamics might be the consequences of COVID-19 pandemics, such as lockdowns and overall reluctance to visit food establishments. After all, the revenues are very sensitive to macroeconomic conditions in the countries that generate the highest revenues. As the market changes, the company also has to adapt: thus, the cash ratios in the time period of 2018-2020 have dropped significantly. This indicates that Starbucks has efficiently adjusted to the market conditions, securing its position.
Another factor is the profitability of the franchise, which comprises the better part of the Starbucks chain. Since it is franchising that is the main source of the company’s income, the franchise buyers are actually the main source of investment. Thus, the return on investment of establishments is a key factor in the attractiveness of the company’s franchise compared to its peers. In the case of Starbucks, on average, the investment in opening a coffee shop pays off in 2 years, which is much less than the return on similar franchises.
Due to this factor, the company has a significant competitive advantage. The financial leverage rates of Starbucks have experienced significant changes during the period from 2018 to 2020. In 2018, the degree of financial leverage was 0.53, while in 2020, it had dropped to 0.08, which indicates that the company has increased its sustainability during the period.
On October 29, Starbucks shares fell 6% at nearly five times the average trading volume. This came amid the company’s fourth-quarter report, in which sales rose 31% to a record $8.1 billion and earnings per share nearly doubled to $1.00. Profit came up to expectations, but sales fell short of Wall-street’s projected $8.3 billion. It was due to the fact that the market ignored the period of Starbucks’ record sales in 2019, which was particularly impressive given the unusual operating conditions during the pandemic. Rising prices and renewed anxiety over store visits failed to scare away loyal Starbucks customers last quarter of 2021.
This proves the strength of the brand and the loyalty of its customers. In terms of valuation, Starbucks’ profits/expenses ratio is the lowest since 2019 at the projected profit. This is still a high rating compared to peers, but it is justified given the historical growth numbers, which include many positive profit surprises.
Loss of solvency in the long or medium term threatens Starbucks LLC much less than most peers. The liquid assets of Starbucks cover short-term liabilities much more fully than that of the overwhelming majority of other enterprises in the industry; thus, the risk of loss of solvency in the medium term is minimal. The debt ratio shows that, despite increasing in 2019 to 1.32 from 0.95 in 2018, the company is still sustainable – in 2020, the debt ratio decreased to 1.27, which is significant. The indicator of receivables turnover also deserves special attention – it is worth noting its low share in relation to the number of current assets in the period from 2018 to 2020. This indicates the effectiveness of the company’s policy of dealing with buyers and customers.
It is also worth paying attention to the constantly increasing amount of long-term debt from 2018 to 2020: the rate has grown from $9 million to $14,6 million. The increase in this indicator may be associated with both unfavorable economic conditions of the recent years due to the pandemic and with the need to monitor the work with receivables and partner companies. However, taking into account the presented data, it can be concluded that there is currently no significant distraction of circulating funds for repaying creditors.
Industry Analysis
Starbucks’ net profit margin dropped to 0.04 in 2020, as opposed to 1.30 in 2019 and 1.02 in 2018, which is quite significant. Such a drastic decrease was, indeed, influenced by the COVID-19 pandemics and affected the whole fast-food industry. Still, Starbucks is performing better than the industry averages, showing 2.9% of profit margin against -1.9% average of the industry (ReadyRatios, 2021). It is safe to say that the company, while still experiencing struggle during the pandemic, managed to retain its position on the market.
Starbucks’ gross profit margin has also dropped: from 0.68 in 2018 and 2019 to 0.67 in 2020. A decrease was due to the shops closure and lowered flow of customers in the aftermath of pandemic. In this regard, Starbucks is performing significantly worse than the industry averages, showing a large gap between the company and the competition. According to ReadyRatios (2021), Starbucks’ gross profit margin in 2020 was 20.9%, while the industry average was 40.5%. Low operations and sales have led to Starbucks lagging far behind the industry.
Finally, the operating income margin of Starbucks has also decreased significantly in the period from 2018 to 2020. The rate, which was 0.008 in 2018, dropped to 0.004 in 2019, and, subsequently, to 0.002 in 2021. Such a decrease resulted in the decline of the company’s operations rate, which indicates lesser investment in production from Starbucks. Still, in this regard, Starbucks performed better than the industry averages: 5.6% of operating income margin compared to -2.4% of industry average (ReadyRatios, 2021). This shows that, while the competitors suffered much from the pandemics, Starbucks managed to recover from the blow of lockdown faster and more efficiently.
Conclusion
Thus, it can be concluded that the annual financial reports allow one to assess the efficiency of the company, as well as the level of its responsibility in relation to shareholders, investors, and customers. Starbucks’ financial analysis for the period from 2018 to 2020 shows that the company, despite the pandemic, managed to remain stable and highly profitable. It is clear that Starbucks will continue to remain one of the industry’s leaders in the future, as even the pandemic did not affect the company too drastically.
References
ReadyRatios. (2020). Starbucks Corporation (SBUX) Financial Analysis and rating. Starbucks Corporation earnings, ROA, ROE benchmarking. Web.
Starbucks Corporation. (2021). Starbucks reports Q2 fiscal 2021 Results. Starbucks Corporation – Starbucks Reports Q2 Fiscal 2021 Results. Web.