Our analysis of a company listed on US Stock Exchange is based on Starbucks Corporation, while for the purpose of comparison with the competitor within same industry, we shall be analyzing financial statements of Dunkin Donuts.
Starbucks Corporation is a leading marketer and retailer of coffee, having its outlets in 60 countries around the world. The stock of the company is listed on NASDAQ Stock Exchange with the tick symbol of ‘’SBUX’’. Apart from selling coffee, the company is also involved in tea, beverages and variety of fresh food items. Today, Starbucks is a leading and most recognized coffee brand in the world. The most popular brand of Starbucks, K- Cup sources 72% of the total revenue for the company alone.
Current Market price: $79.82
Market Capitalization: $59.86 Billion
Enterprise Value: $58.10 Billion
Revenue: $ 13.29 Billion(2012)
Profit: $ 1.38 Billion(2012)
52 Week Change: 72.33%
Trend In Market value of Share Price: (One Year Analysis)
At the time of writing, Starbuck Corporation Stock was trading at $79.82 with a 0.97% rise in price compared to previous closing day. The stock price have followed an increasing trend restraining our analysis to one year. From the level of $42, the stock is now trading at the level of $79.82, with 52 week range of 45-81.08 while the next earning declaration is scheduled on 30th October, 2013. The Stock has been 6000% higher when compared to the price of its Initial Public Offering.
At time of writing, the Stock of Dunkin Donuts was trading at $48.60 with a rise of 1.97% in comparison to previous Year. Dunkin Donuts who is a renowned franchisor of hot and cold coffee, bakery goods and ice cream has achieved a high return for their shareholders during an year. The stock is trading with 52 week range of $28.70- $49.40. Thus an attractive 72% yield was earned by Dunkin Stock in an year.
Comparing Stock Prices of Starbucks and Dunkin Donuts:
As for the Brand- ‘’Starbucks’’, people see it as a big luxury brand in coffee industry. This indeed is a significant strength for Starbucks as this ideollagy gives it a competitive edge over other brands in the industry as people associate it with high quality and a company with popular existence.
Analyzing Financial Numbers:
The company in its recent annual report of 2012, declared a Total Revenue of $13.3 billion which was 14% more than previous year. During our 4 year of trend analysis of the company, the revenues of the company has shown upward trend on account of recent 7% growth in comparable stores sales and also in particular to 50% increase in revenue by Channel Development. Since primary strategy of the company is to expand its operations at a rate higher than its competitors, it was really important to analyze how the existing stores ar performing apart from looking up the performance of newly opened stores.
Reviewing comparable store sales growth of the company since 2008 that was hovering in -3%, the company in its SEC Filing declared that this decrease was on account of increase in value per transaction which was offset by decrease in total number of transactions. The condition went more worse when this multiple was reduced to -6%. However, the current scenario seems better with now store sales growth at 8% during 2011 and 7% during 2012.
Most interesting and appreciated factor from Starbucks Management was reduction in Common Size Factor Percentage of Selling and Distribution Expenses to Sales Ratio. As of 2012, the company reduced this percentage from 37.08% to 35.38% which was the main driver for increase in operating as well as net bottom line incomes. The graph below indicates how Starbucks has improved its revenue/share since 2008.
Operating Income of the company was $2 Billion as compared to $1.7 billion in 2011. As a result, the operating margins of the company improved from 14.8% to 15% during 2012. The expansion was result of increased revenue and also absence of charges relating to closure expenses of Seattle’s Best Coffee Store. The ever improving operating margins of the company where the company has made a big leap from 4.9% operating margins in 2008 to 15% margin in 2012 indicates efficiency of management where they have shifted their focus to cost management and strong pricing strategy. Even though, US market is suffering from tight consumer spending, Starbucks have managed to maintain growth in its fundamentals which was clear indication that profitability through consumer satisfaction was the core criteria of company’s policy. Also The company also outmatches its nearest competitors with 24.54% return on investment and 29.16% return on equity.
The cash flow statement was also another indicator of Financial Soundness of the company. Most Importantly, company have maintained a good ratio among Cash Flow from Operations and Cash Flow on Capital Expenditures. Owing to efficient management and reducing Selling and Administrative Expenses to Sales Ratio, Starbucks Corporation has managed to produce a healthy Cash Flow from Operations with a steady growth in numbers every year. While Cash Flow From Operations has increased from $1259 in 2008 to $1750 during 2012, the reducing-constant trend in capital expenditures of the company was another contributor to financial soundness.
Apart from earning high profits driven by increasing revenue, StarBuck surely knows how to keep its shareholders happy. The Earning per Share Ratio has been in increasing trend with EPS being $1.72 during 2012. At present, company has dividend yield of 1.10% while the latest dividend pay out was $ 0.84.
Comparsion with Dunkin Donuts:
For many years, Starbucks had earned monopoly profits by dominating coffee chain business. However, as of now it is facing some real competition from other old established Dunkin Donuts that has achieved growth through high customer satisfaction and some innovative strategies to incorporate changing consumer taste. Dunkin Donuts which is both a coffee retailer as well as donuts manufacturer has posed threat to market supremacy of Starbucks Corporation.
Ratio Analysis- Starbucks:
In terms of analyzing the financial statements, the ratios tells us the same and more clear picture of current scenario of Starbucks Corporation. In terms of Solvency Ratios, the Debt/ Total Capital Ratio which is at 9.7% is in line with Eateries Industry and thus on healthy terms.
Further, the Current and Quick Ratios, confirms strong liquidity of the company and assure that company can indeed serve its short term obligations. Company during 2012 had a healthy current ratio of 1.9 and quick ratio of 1.1.
- Current Ratio: 1.7
- Quick Ratio: 1.1
Activity/Asset Management Ratios are also indicating good financial health of the company. To discuss a few, Accounts Receivable Turnover Period is also consistent for the company with the industry level at 12 days(Approx). Also the company is most efficient in managing its inventory as its Cost of Goods Sold tied up in inventory was only 69 days although the Process Period of Inventory has increased over last 4 years of our analysis.
- Total Assets Turnover: 1.7
- Fixed Assets Turnover: 5.3
- Inventory Turnover: 5.1
- Accounts Receivables Turnover: 30.8
- Return on Assets: 15.05%
- Return on Capital: 21.37%
- Return On Equity: 28.73%
- Net Margin: 10.4%
- Gross Margin: 57.07%
- EBITDA Margin: 18.83%
- SG & A Margin: 35.29%
Cash Flow Ratios:
Fundamental Comparison: Starbucks vs Dunkin Donuts
Ratio Summary: Starbucks vs Dunkin Donuts:
In Comparison of Starbucks and Dunkin Donuts over Ratio Analysis, we can see some interesting trends.
Gross Margin: Gross Margin shows the actual profitability before expenses and other cost are deducted. It shows how much profit a company is capable of earning from sales of its products. While Starbuck’s Gross Margin is 56.03%. Dunkin Donuts on account of multiple products differentiation is earning 78.09% gross margin.
Return on Assets: Return on Asset shows how profitable are company’s assets in generating revenue. Starbucks have higher ROA ratio at 17% in comparison of 3.36% ROA of Dunkin Donuts. The reason of high ROA of Starbucks is because of Higher Net Income and Less Assets.
Current Ratio: This Ratio is used to judge short term liquidity position of the company and whether the company will be able to meet its short term financial obligations. Dunkin Donuts have serious concerns over their decreasing liquidity while Starbuck’s Liquidity Position have improved constantly year after year. During 2012, Current Ratio of Starbucks was 1.19 while for Dunkin Donuts was 1.09.
Quick Ratio: Also known as Acid Ratio, this ratio is considered to be the most stringent measure of liquidity. In 2009, Starbucks had a quick ratio of less than 100%, meaning they had more current liabilities than could be paid off if inventories were excluded. Since then, their quick ratio has improved and as of 2012 it was better than that of Dunkin' Donuts.
Debt Equity Ratio: This Ratio indicates total use of Debt in the capital structure of the company. Lower is the use of debt, less is the financial risk of the company. While Debt Equity Ratio of Starbucks is at 38% only, Dunkin Donuts have a high Debt Equity Ratio of 89%.
Interest Coverage Ratio: This ratio indicates the financial soundness of the company to pay off its interest expense. Higher the Interest Coverage Ratio, more is the financial strength of the Company to pay of its Interest Expense. During 2012, Interest Coverage Ratio of Starbucks was 61.08 times, while for Dunkin Donuts it was only 3.23 Times.
Asset Turnover: Asset Turnover Ratio measures the efficiency of assets of the company. During 2012, Starbuck Asset Turnover was 1.7 while for Dunkin Donuts it was just 0.20. Thus, it shows that Starbuck’s Assets were more efficient than of Dunkin Donuts.
Inventory Turnover Ratio: This ratio indicates how many times inventory is sold in an year. During 2012, Starbucks had Inventory Turnover Ratio of 78 Times while Dunkin Donuts was low on its inventory turnover with ITR of just 6 times.
Past One Year Comparison of Starbucks vs Dunkin Donuts:
Growth Over Prior Year - Starbucks Corp (SBUX)
Growth Over Prior Year - Dunkin' Brands Group Inc (DNKN)
Return on Equity- Starbucks vs Dunkin Donuts: Using DuPont technique:
ROE = (net income / sales) * (sales / assets) * (assets / equity)
2012: 1384/13300 * 13300/8219 * 8219/5109 = 27.1%
2011: 1246/11700 * 11700/7360 * 7360/4385= 28.3%
2010: 946/10707* 10707/6386 * 6386/3675= 25.66%
Starbucks Corporation: Strength
Strong Growth Prospects:
Starbucks with approx 18000 stores in over 60 countries is the most valuable coffee chain in the whole world. The company has been continuously investing to expand its stores. Although as of now, 75% of total share from revenue comes from US Market only, Starbucks has now moved to Asian Countries expecting better consumer response. During 2012, company opened its 700th Store in china under its expansion plans for Asia Pacific Region. Also,during the calendar year of 2012, company in an alliance with Tata, India, opened their new stores in Delhi and Mumbai under a joint venture of 50:50 Ratio with TATA Group.
Apart from their expansion plans in Asia, company also announced to open new stores in Scandinivia and also new retail store locations in SanFransisco and Seattle.
Considering the trend in comparable same store sales growth during past 3 years, it is most likely that their expansion plans will shine their fundamentals among the eateries industry. A healthy comparable sales growth ensures that its top line growth overshadows the overhead costs. Also, the urge to retain and expand customer base through offering ever changing menu to adapt as per the taste of the customer is indeed a strength and reason behind StarBuck’s Success.
Starbucks Corporation- Weakness:
High Reliance on US Market
StarBucks is expanding its business to Asia Pacific Regions where the core focus is on China and Indian Market, although these expansion decisions could provide ample amount of estimated benefit to the company however, still the focus is on US Market. In other words, overdependence on US Market could turn out to be major weakness for StarBucks Corporation. Although Starbucks have its retail stores in around 60 countries from US, Europe, Asia, Africa, but the percentage contribution of international stores is quite less when compared to revenue generated from US Stores. As of 2012, 76.5% of total revenue was generated from stores operating in US, while 23.5% of the revenue was from other countries.
This indicates, strong survival on US Market for success, thus any decline in revenue generated from US Stores or any negative macro estimates relating to consumer spending could limit available cash flow for expansion in international markets and will also affect any cash related activity.
Sole Reliance on Coffee Business:
As per 2012 Annual Report, Starbucks have 76% of their revenue from coffee sales and even the other 24% is related to coffee. So The entire business is set up on coffee industry. Thus, if coffee industry turns fad, it is possible that StarBucks have to diversify their business. This statement is on the basis of other nearest Competitors of Starbucks Corporation like Dunkin Donuts, who have invested in many industries and not just Donuts.
Also, the Starbucks which is indeed a luxury brand to afford in Coffee Industry, but still people think that Starbucks charge quite high. Also the recent criticism of Starbucks in Chinese Social Media for charging excess and discriminatory prices in Beijing Store when comapred to Coffee Prices in Mumbai and London. The report said that a Starbucks Coffee costs double the cost as in Mumbai. Thus these non-consumer friendly approaches may turn out to be ill for Starbucks.
Our Analysis over Starbucks Corporation indicates that the company have strong financial multiples and even when compared to its Competitor Dunkin Donuts, Starbucks was better in almost all arena ranging from Liquidity, Asset Turnover etc. Thus, Starbucks Corporation is indeed worth an investment for long term period. Further Strong Growth Prospects of the company in Asia and other regions validates our conclusion. However, growing competition, excessive reliance on US Market and Low Product Differentiation are serious threats for the company which they have to overcome soon.
Dana, M. (2012). CIF Stock Recommendation-2012-SBUX. USA.
Dunkin Brands Group Inc. (2013, October 26). Retrieved October 26, 2013, from Morning Star: http://financials.morningstar.com/ratios/r.html?t=DNKN®ion=USA&culture=en-US
Dunkin' Brands Group, Inc. (2013, October 26). Retrieved October 27, 2013, from Yahoo Finance: http://finance.yahoo.com/q/bc?t=1y&s=DNKN&l=on&z=l&q=l&c=SBUX%2C+&ql=1
Morning Star Analyst Team. (2013). Starbucks Corporation. Retrieved october 25, 2013, from Morning Star: http://tools.morningstar.com/charts/mcharts.aspx?security=SBUX&CountryId=USA
(2013). Starbucks Corporation- Financial and Strategic Analysis . USA: Global Data.