Starbucks Financial Analysis 2018

Starbucks Financial Analysis 2018

Milianet Santiago Vargas

Southern New Hampshire University

                            Financial Analysis: Starbucks Corporation

The purpose of the following study is to analyze the competition and develop benchmarks for the purpose of improving profitability and expanding operations for the marginally successful, Midwest-based Coffee Connection. The most similar competitor to the Coffee Connection is the Starbucks Corporation, an American coffee company and coffeehouse chain that is based in Seattle, Washington and includes more than 25,000 shops in 75 countries (Hoovers, n.d.).  Therefore, and in order to perform the analysis, there will be multiple tools used to analyze the performance of the Starbucks Corporation as well as research and observations pertaining to the success and challenges faced by Starbucks. The overall goal is to provide information to the Coffee Connection business leaders by creating more in-depth financial accounting statements and all the involved components in order to make better business decisions related to performance and financial health within the coffee shop industry. All in all, the result will aid in creating effective management and informed management decisions.  

In order to obtain this goal and reach the desired results, the following study will first focus on the analysis of the Starbucks Corporation’s financial condition by interpreting financial information used for informing business decisions. This includes any horizontal and vertical changes in Starbucks’ accounts receivables balances (via the balance sheet and income statement accounts), fixed assets, intangible assets, depreciation, amortization, and short and long-term debt for a two-year period (2017 – 2018). Additionally, the methods for accounting for receivables and evaluating uncollectible receivables and how they affect they ways in which information is communicated; the methods for fixed asset and intangible asset acquisitions as well as depreciation and amortization (and asset categorization) and how they affect the balance sheet, income statement, and statement of cash flows; and the debt financing that encompasses current and long-term liabilities and the issuance of bonds. Secondly, this study will analyze and discuss the financial performance of Starbucks using financial ratios. This encompasses liquidity, solvency, and profitability ratios and what each reveal about Starbucks, including the description of benchmarks, standard measurements, and all types of analyses used once the ratio amounts are known. Thirdly, this study will provide an overview of the importance of accounting regulations and reporting requirements in the preparation of financial reports and consideration of the governmental and GAAP reporting policies for what is mandated that is included in Starbucks’ financial statement. This includes required control procedures and reporting consisting of segment information, estimates and assumptions required, investments and fair value required, and leases required, and the information disclosed about Starbucks’ regarding all of the above.

Vertical and Horizontal Analysis: Starbucks Corporation

Starbuck’s net revenues increased 10% to $24.7 billion in fiscal 2018 compared to $22.4 billion in fiscal 2017¹. Also, there was an increase between 2016 – 2018 in terms of cost of sales, that typically involves, the cost of materials to produce, occupancy cost, labor and other costs. Both factors indicate that the hold performance of the company is most likely trending positive and the main objectives are being achieved. In the other hand, performing the horizontal analysis which can indicates changes over time in financial line items and the direction a business is taking, it reveals that Starbucks accounts receivable went from 870.4 million in 2017 to 693.10 million in 2018, a 20% decrease². Accounts receivable went from 6.06% in 2017 down to 2.87% in 2018, of total assets. Accounts receivable decreased substantially in 2018, after a consistent proportion the previous three years.

³Sales increased from 2017 to 2018 so the reduction in accounts receivable could be due to establishing less credit with vendors, reducing credit limits taking payment at delivery. The allowance for doubtful accounts decreased from 2017 to 2018, receivables are mainly comprised of receivables for product and equipment sales to and royalties from their licensees, as well as receivables from their CPG customers. (p.62 of Starbucks annual report about Receivables, net of Allowance for Doubtful Accounts). Starbucks may have tightened up on establishing credit terms and reducing the amount of credit to customers.

In examining a horizontal analysis of the changes in Starbucks’ fixed assets, intangible assets, depreciation and amortization over time (2016-2018), the result revealed an increase of 20.52% on fixed assets (property, plant and equipment etc.)⁴ an increase of Goodwill from $1,539.20 (2017) to $3,541.60 (2018) a 13.01%⁵. On the vertical analysis shows that the property went from 34.25% (2017) to 24.54% a decrease from total assets, showing an increase in assets could not make up from the large increase in current assets, specifically cash. According to the Starbucks Annual Report 2018, everything under the property, plant and equipment categories have carrying amounts as the balance sheet date of depreciable or tangible assets. All the Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (p.46 Starbucks Annual Report 2018).

¹See Appendix A (line 10)

²See Appendix B (line 7)

³See Appendix A (line 11)

⁴ ⁵See Appendix B (line13-17)

Continuation

On the examination of the horizontal analysis Starbuck’s short-term debt shows a decrease of $47.10 or 20.60%. Also, in the vertical analysis present a decrease from 1.59% (2017) to 0.75% (2018)⁶. This may be is an indicator that the cash flow is increasing. And the company are focusing on the long-term debt to get better interest rates for future upgrades.

As for financing activities, the cash flow statement show that the proceeds of long-term debt had increase the double or more in the past year. In 2017 was only $3,932.60, for the end of the fiscal year 2018 was $9,090.20 a 13.11% on the horizontal analysis⁷. On the vertical analysis show how on 2017 was 27.38% and increase almost 10% more to 37.63%. Additionally, the total accrued liabilities have increase. This possibly means that since the balance is high and if each liability remains outstanding for long time, can create more cash flow.  Starbucks utilize short-term and long-term financing and may use interest rate hedges to manage our overall interest expense related to our existing fixed-rate debt (p.45 Starbucks Annual Report 2018). According to the Annual report Starbucks got a Commercial Paper program that works like bonds (increasing interest rate and long-term maturities) Base on the market Starbucks start with this program since 2016 and it will continue to the maturity date of June 15th, 2026. When this happen, the company will receive cash and report it in the cash flow statement of that year.

⁶See Appendix B (line 6)

⁷See Appendix B

Key Financial Statement Ratio

Financial analysis is used to examine a company’s financial performance according to its objective goals and strategies. Two principal tools are used in the analysis: ratio analysis and cash flow analysis. Ratio analysis involves assessing how various transactions in a company’s financial statements relate to one another. This can be used to compare a company’s present performance to past performance or competitor’s performance in their industry. It provides the foundation for making forecasts of future performance. Cash flow analysis is used to examine the liquidity of a company’s assets. It can further asses the management of operating, investing and financing cash flows. We will use these two analysis tools to draw a conclusion on whether we should invest in Starbucks based off its current financial position and past performance.

Liquidity Ratio

Liquidity Ratios determine the ability of the company to pay off its short-term debt obligations within the operating cycle. In other words, liquidity refers to the process of converting noncash assets into cash (Financial Accounting 10th Edition Harrison, Horngren, Thomas 2010). Having a high level of liquidity is important for a company. A company needs to focus on converting noncash assets into cash quickly in order to pay off its current liabilities. During our analysis we looked at two of the most important ratios: the current ratio and quick ratio. In order to calculate these ratios, you will need to refer to the balance sheet to find the variables used in the equations. For the current ratio you will use current assets and current liabilities; the quick ratio will use the same variables but in a more restricted way. A company’s current ratio is calculated by dividing current assets by current liabilities. A ratio larger than one shows the ability of the company to pay back its current liabilities with the cash produced from operations. However, having a ratio that is significantly greater than 1 is not necessarily a good thing. A large ratio can indicate that a company has assets sitting idle. Idle assets are assets that are not being put to productive use. Therefore, idle assets are usually undesirable. A company could face a short-term liquidity problem when some of its assets are not easy to liquidate. If a company’s ratio is less than one, it would be a good indicator that the company might not have the means to convert noncash assets to cover the current liability obligations. For example, in terms of Starbuck this could reveal their ability to pay off its short-term bills. In 2017 and 2018, Starbucks current ratio were about 1.25 and 2.19¹. The current ratio shows a real difference between both years. This mean that Starbucks got a good - short term financial strength, like to fulfill their responsibilities.