Starbucks, a premium coffee house, is recognized as the leader in its category in many aspects such as marketing strategy, quality of services and most importantly from financial perspective. Exploring certain objectives of the financial perspectives has been adopted as the objective of this report.
Starbucks with listed symbol of SBUX on Nasdeq 100 is categorized within Specialty Eateries of the service sector on finance section of yahoo. Starbuck is the leader (on many aspects within its sector) mainly with respect to market capitalization of $. 38.01 Bn (88%) out of $. 43.0 Bn of the industry (Yahoo! b, 2012). The other top players of the industry in specialty eateries are presented in the graph below:
These industry peers are based on categorization from finance yahoo and hence, variation can exist among other service providers with respect to financial valuation. To develop more insight about the financial conditions of Starbucks, the report attempts to compare the trend of Starbucks with competitor Carribou Coffee Company Inc that shares 1% of the industry. It has been picked for comparison in place of [PNRA] that constitutes almost 11% of the industry and ranks seconds in terms of market capitalization however the main reason is that the main business of Carribou Coffee Company also is coffee brewing similar to Starbucks.
Section I: Evaluation of Starbucks accounting policies with respect to its competitor refers despite both firms’ develop financial statement based on GAAP rules however, assumptions to develop the statements are based on management’s discretion and hence, deviations and variations exist. The report has also highlighted the possible impact of changing in the accounting standards from GAAP to IFRS as the debate for the same is on height globally and is building considerable pressure on US for harmonizing the standards.
Section II: This section analyzes the financial ratios of Starbuck and its competitor for the years 2011 and 2010. From horizontal and competitor comparison, it has been concluded that despite strong balance sheet Starbucks needs to give its income statement a strong push.
Section III of the report covers the stock price position of Starbucks with respect to its current condition and future prospects. Analysts have been recommending Starbucks mainly within Strong buy; Buy and Hold segment. This recommendation is based on the fact of company’s sound financial balance sheet, global expansion and acquisition strategy that is adding value to its future growth prospects in the short and long term.
– EVALUATION OF ACCOUNTING POLICIES
Accounting policies are among the most important factors that require management consideration. These policies actually derive the financial results based on various assumptions, projections and estimations that are further dependent upon financial environment, business and industry conditions. Adoption of critical accounting policies are also subject to complexity based on the inherent uncertainty and subjectivity required to be adapted within critical, complex and more important reasoned judgment.
This aspect that forms the basis of financial statement is as complex for Starbucks as for other companies; or appropriate to state would be the fact that it is relatively difficult for the Starbucks as compare to competitors mainly for its globally expanded operations that requires business to develop consensus in results as well as underlying assumptions for preparing financial statement. For instance, US companies follow GAAP accounting rules while many countries have switched to IFRS rules. Since both standards have considerable deviations; hence, the results are expected to derive considerable deviation consequently (Norris, 2012).
Starbucks, claims, in order to provide valuations more transparent and accurate reviews these assumption every quarter in order to account more uncertainty that is taking up business environment. Accounting policies as discussed in the financial statement includes following:
– Asset impairment
– Goodwill impairment
– Stock-based Compensation
– Operating Leases
– Self Insurance Reserves
– Income Taxes
– Litigation Accrual
The accounting policies of competitor Carribou discusses following:
– Long lived asset
– Stock-based Compensation
– Lease accounting income taxes
Starbucks and the competitor Carribou both being US based follow GAAP rules hence, accounting policies do not have any meaningful difference. However, the results are subject to change as are driven by management’s discretion in inferring insight from the business and market conditions. For instance, considering the size of the business Starbucks discounts its cash flow at lower discount rate while Carribou is expected to use comparatively higher discount rate or as the case may be. To mention, with the growing debate worldwide for the standard set of accounting principle to increase the quality of the financial statements and consistency as well as comparability across the world. Adoption of IFRS (International Financial Reporting Standards) by US and so by US based companies is expected to have considerable impact on financial statement (Case, Cohen, Fisher, and Moon, 1999). As, for example, the case of lease accounting both companies might need to adjust their operating lease properties to account changes proposed in lease standard of IFRS.
– ANALYSIS OF THE FINANCIAL STRENGTHS AND WEAKNESSES
ANALYSIS OF RATIOS
Based on the ratios and their graphical representation, on many fronts it appears that competitor Carribou is in A better position. For instance, the liquidity and efficiency position on both aspects Carribou takes considerable lead. However, such notes are not reflection of Starbucks weak performance but are mainly due to fact of huge difference between the sizes of the firm where former constituting 88% percent of the industry whereas latter only accounts for the 1% based on the market capitalization. It can be witnessed from the financials presentation that performance of two companies is featured differently. For instance, sizebable positive results of the Carriobou have moved in positive domain with kind of jump while Starbucks performance has been consistent. This is also reflective of the sound financial position of the firm to remain consistent despite the extensive jerk of financial crises.
Long term debt of the firm under evaluation is high; however, in that case even the firm’s balance sheet has interest coverage capacity in line with competitor. Moreover, the firm is paying dividend to its shareholders along with carrying global expansion strategy while the competitor has fetched position with retaining the entire earning and follows no dividend policy.
In comparison with competitor, the entire financial position of Starbucks is its strength. For instance, market capitalization that constitutes 88% of the entire segment is the biggest strength Starbucks enjoys that provides its muscles to drive the industry in its preferred direction. Moreover, the consistency in balance sheet is another very important strength of Starbucks.
The problem with the Starbuck’s financial position is in its profitability. Profitability condition of Starbucks raises question and in particular the net profit margin of the company. Despite the considerably high operating profit margin as compare to competitor highlights the sizeable cash outflow in debt servicing; moreover, taking cash flow position in line with competitor and declining than previous year. Since, the industry is growingly getting competitive and cost of raw material is also increasing pressure; therefore profitability condition requires to be enhanced with strong measures. Similarly, the ratio of sales to stock holder’s equity has also declined as compared to previous year. Hence, despite carrying strong balance sheet, income statement of the Starbucks requires positive growth.
– STARBUCKS STOCK PRICE PERFORMANCE
The stock price of the Starbucks is $.51.12 as on December 4, 2012. It is on the buy side of the recommendations from the associated list of analyst that evaluate the Starbucks share.
This recommendation is mainly based on the strong consistent growth and sound financial performance with respect to company’s revenue, EBITDA, and EPS as compare to competitors. Seeking Alpha, (2012) has suggested Starbucks as a strong buy considering the prospect growth despite its inability to yield profitability above than par from peers evaluated in his estimation. Ground factors that makes Starbucks strong is its consistency in growth with respect to market expansion, rolling out products e.g. Verismo, K-cups etc. Moreover, Starbucks acquisition of Teavana () has been taken as much sound strategic move that entails prosperity with double-digit growth probability for Starbucks. However, Seeking Alpha, (2012) highlights the profitability performance of the Starbucks lacking to be in line with given peers despite its capacity to fetch sizeable margins. Below are presented the valuation of Starbucks stock price with its financials compared with competitors by Seeking Alpha, (2012):
(Seeking Alpha, 2012)
(Seeking Alpha, 2012)
The valuation also refers that stock is trading within the fair value and shall be considered an adoption in portfolio despite the fact of not being cheap stock keeping an eye on the strong balance sheet and as attractive future prospects.
Morning Star, as on 4th December 2012 referred Starbucks on Buy side as follows (Morning Star, 2012)
(Morning Star, 2012)
Analytical report by Morning Star (2012) suggests Starbucks as buying side despite its skeptical view regarding the changing dynamics of the industry and growing pressure. Attributing the expected growth to increase in packaged goods distribution, licensing partnerships as well as global expansion that would take revenue growth near to high of 20% which the company has achieved in 2007 and that will give momentum of similar growth to its cash flow in next ten years. Hence, the stock is strongly within buy and hold segment.
Analyst at Nasdaq alike above has suggested Starbucks in Strong buy category and success of consensus estimates has developed consensus herein as well (Nasdaq, 2012)
The positive growth prospects as developed in consensus by analyst at Nasdaq among many factors has predicted the growth Starbuck to generate P/E and earning growth at considerable level than restaurant industry (Nasdaq, 2012):
Hence, Starbucks stock is recommended as strong buy from various groups of analyst based on its strong financial position, mainly expansion strategy and other strategic options such as acquisitions in Tea segment etc supporting it to maintain its position of premium coffee leader.
List of References
Annual Report a. (2011). Starbucks Corporation. Available from [Accessed 5 December 2012]
Annual Report b. (2011). Carribou Coffee Company. Available from [Accessed 5 December 2012]
Morning Star. (2012). Starbucks Corporation. Available from [Accessed 5 December 2012]
Nasdaq. (2012). Stock Research – Analyst Summary. Available from [Accessed 5 December 2012]
Norris, F. (2012). The Case for Global Accounting. The New York Times, available from [Accessed 4 December 2012]
Seeking Alpha. (2012). Starbucks: Not Cheap, But Still A Buy. Available from [Accessed 5 December 2012]
Starbucks. (2012). Starbucks Investor Relations. Available from [Accessed 4 December 2012]
Yahoo! a. (2012). Caribou Coffee Company Inc. Available from [Accessed 4 December 2012]
Yahoo! b. (2012). Industry Center – Specialty Eateries. Available from http://biz.yahoo.com/ic/713.html [Accessed 4 December 2012]