FINANCIAL ANALSYSI AND VALUATION OF STARBUCKS CORPORATION

 

About Company           

With locations in eighty-four different countries, the American coffee chain Starbucks Corporation is the largest coffee roaster, marketer, and retailer in the world. It was founded in 1971 in Seattle, Washington, as a worker-owned business. Starbucks' main office is located in the United States. On the NASDAQ, shares of Starbucks Corporation trade under the name "SBUX." It seems to reason that because selling coffee is fundamental to Starbucks' business model, the corporation sets a premium on procuring premium beans, roasting them to perfection, and delivering them to customers in flawless shape. Several various types of coffee and tea, including Tea-vane, Starbucks' Best Coffee, Evolution Fresh, Ethos, and Starbucks Reserve, are available from the Starbucks Corporation. [2022] (Starbucks)

Product and Services

Coffee from Starbucks is a well-liked choice in a variety of countries throughout the world. Both in the domestic and foreign markets, we run shops that are company-owned as well as outlets that are franchised. We offer roasted whole bean and ground coffee, single serve goods from Seattle's Best Coffee, Starbucks, and Teavana, as well as a range of ready-to-drink beverages (including Frappuccino and Starbucks Doubleshot), foodservice products, and other branded items via our Channel Development business. Our international ready-to-drink division collaborates with companies such as PepsiCo, Tingyi-Ashi Beverages Holding Co. Ltd., Arla Foods amba, and others. Our Channel Development division uses a business model that is licensed from Nestlé's worldwide Coffee Alliance.

                                                                                                      

Product Life Cycle and market share

The stages that make up the "Product Life Cycle" are called "incubation," "launch," and "maturity," respectively. Starbucks has moved into the stable phase of its business expansion. According to UKEssays (2017), Starbucks has a lot of satisfied customers. Starbucks is a dominant force in the retail industry when it comes to sales of beverages and food. When looking at the two big companies in the coffee market in the United States, Starbucks and Dunkin' Donuts, the former has 15337 locations, while the latter only has 9000. The following is a breakdown of our reportable operational segments for the fiscal year 2022, as a percentage of total net sales: Channel Growth was responsible for 6% of the total revenue, with 72% of it coming from North America. From Statista (2020).

                                                                                                                 

Management and Corporate Governance

For the purpose of ensuring that its coffee shop network is run efficiently throughout the United States, Starbucks has put in place an exceptional corporate governance framework and a top-notch management team. The firm is managed by a board of directors and a team of executives with a variety of experiences working in the hospitality sector. The management team of Starbucks is accountable for managing the day-to-day operations of the company, formulating and upholding the company's strategic goals, and ensuring compliance with all applicable laws and regulations. In accordance with the requirements imposed by the SEC, Starbucks has devised a code of conduct for its chief executive officer, chief financial officer, controller, and other professionals working in the financial sector.

Business strategy

We want to keep investing in our innovative digital platform and existing network of corporate contacts. Our goal is to expand the number of Starbucks cafes across the world in a way that maximizes profits. Our goal is to keep the dream of opening a Starbucks alive in the minds of people everywhere. Our company's HR department is responsible for managing employees so that a diverse group of individuals can provide exceptional service to our many customers. As a result, a plethora of mentorship programs have emerged, strengthening the web of relationships between entry-level employees and top management.

One other way we want to grow is by opening new branches in existing and potential new markets. Starbucks' steady growth may be slowed or even halted by a number of potential obstacles. If Starbucks breaches local, state, or federal privacy laws, the company might face serious consequences. Our business might be jeopardized by the erratic behavior of our customers. We are unable to grow Channel Development as a result of our deal with Nestle, which prohibits us from doing so. If Nestle's violation of the agreement has a negative effect on the company's financial performance, we will work to terminate the relationship with as little financial damage as possible.

"Porter's Five Forces"

Starbucks' growth and success may be attributed in large part to Porter's Five Forces Analysis. Starbucks Corporation faces significant challenges from competitive competitiveness. There are a large number of coffee shops in this neighborhood, low switching costs between them, and a moderate variety of businesses. The marketing mix, sometimes known as the "4Ps," might be useful to Starbucks Corporation in building its brand and accommodating its consumers' increasing purchasing power. Coffee's availability has given retailers and wholesalers more leverage in price negotiations. Natural disasters such as droughts and crop-killing frosts are only two examples of the factors that lead to water shortage. Starbucks Corporation's corporate culture may help mitigate the threat of substitutes by prioritizing customer satisfaction and loyalty. Starbucks' corporate social responsibility strategy and stakeholder management initiatives are examples of sustainable business practices that might help the firm retain customers. New rivals might eat into Starbucks' market share and revenue, but local cafes would need significant investment and time to create their brands to compete on the same level as Starbucks. For example: (Greenspan, 2022).

Using a consolidated income statement and balance sheet, we analyzed the various sections of Starbucks' most recent annual report for 2022. You may utilize these bank data for your average size and ratio study.

Common-size An examination of Starbucks' past

We have compiled a consolidated balance sheet and income statement for fiscal years 2020-2022 and analyzed them using a common-size format.

Statement of Accounts

Annually, we do a 100% based vertical examination of the balance sheet's components. Total assets for the firm drop to $27,978 in 2022 from $313,92 in 2021. In 2022, the non-current assets will account for 75% of the total, while the current assets will make up just 25%. In 2022, PPE accounted for 23% of total assets, up from 20% in 2021, while OLs accounted for 29% of total assets, up from 26% in 2021. The increase in PPE shows that the organization is prepared to take calculated risks and allocate resources to drive sales. In 2022, "other assets" will constitute the same share of total assets as they did in 2021. A spike in sales at the company's retail outlets has resulted in a rise in receivables.

Shareholder equity declines by 14% in 2022 compared to total company assets in 2021 as a result of an increase in the retained business loss. Despite having produced net income in 2022, the retained deficit is still significant. The retained deficit is now more than 30% of total assets, which raises serious questions about the company's ability to expand.

Liabilities are 131% of the company's total in 2022, up from 117% in 2021. The high total debt-to-assets ratio made it difficult to attract new investors. In 2021, long-term commitments will make up 91% of total liabilities, while current liabilities will account for 26%. In 2022, long-term obligations will make up 98% of total liabilities. The majority of the liabilities section has been made up of long-term loans and operating leases. A high debt ratio leads to higher interest payments and less money available for capital expenditures or dividend payments. The calculation may be found in Appendix III.

Cash Flow Analysis Chart

To establish the proportional relevance of each line item in an income statement, a vertical analysis is performed with revenue set at 100%. Company-owned stores will account for the bulk of revenue beginning in 2020 and continuing until 2022. When sales increase, so do the associated costs of doing company. In 2022, product and distribution costs will eat up 32% of revenue, while operating costs for stores will eat up 42%. Recently, there has been just a little amount of fluctuation in these prices. In 2020 and 2021, interest payments will consume 1%-2% of companies' profits. The company's operating profit margin increased to 14% of revenues in 2022. When operating income increases, it means there is more money coming in to pay off debts like interest and taxes. The share of net profits going to Starbucks investors increased from 4% in 2020 to 10% in 2022. The increased net income demonstrates the availability of funds for distribution to stockholders. The numbers are in Appendix IV.

 

 

Ratio Analysis

 

Liquidity Ratios

 

The current ratio for Starbucks Corporation in FY20 was 1.06, as seen in the above table. The current ratio for FY22 was down at 0.77 for the corporation. With a better current ratio in 2021, Starbucks Corporation showed improved liquidity and could more easily satisfy its near-term commitments. Cash, marketable securities, and prepaid expenses all decreased for Starbucks Corporation, which led to a lower current ratio, but accounts payable and the current portion of the company's long-term debt all increased. The current year's higher PPE outlay has drained the budget. The current ratio of Starbucks Corporation was significantly below the business sector average in 2022. This means that compared to its coffee industry rivals, Starbucks Corp. has a greater ratio and is in a better position to leverage its current assets to achieve its promises.

In FY20, FY22, and FY23, Starbucks Corporation's quick ratio was 0.85, 0.32, and 0.53, respectively. It seems that in order to satisfy their short-term commitments, businesses are becoming more reliant on highly liquid assets. The firm has a quicker ratio than the business sector average of 0.99. The quick ratio of a corporation falls when its cash reserves dwindle. The increase in payables was less significant than the increase in cash on hand. 

 

Solvency Ratios

When comparing fiscal years 20 and 21, Starbucks Corporation's total debt ratio increased by 127%. In FY22, the debt to value ratio for the firm reached 131%. This ratio may be used to get an idea of how much debt Starbucks Corporation has in relation to its total capitalization. The debt-to-investment ratio of Starbucks Corporation rose to 131% in FY22 from 14% in FY21. This has resulted in substantial increases to Starbucks Corporation's long-term obligations for the current fiscal year. The Starbucks Corporation has a total debt load that's higher than the average (81%) for firms in its sector.

As a proportion of total assets, Starbucks Corporation's debt was 4.22 in FY22, 2.69 percentage points lower than in FY21. Because of this, the company will be highly reliant on external financing in FY21, because there would be a lot of debt compared to stockholders' equity. From 2020 until 2022, long-term loans dropped by 11%, while equity dropped due to the repurchase of equity shares. Starbucks Corporation's debt-to-equity ratio in FY22 was about the same as the average across all sectors (4.12). Interest expenses went increased and net income for stockholders rose as the corporation paid down its LT loans. High leverage ratios discourage investors because they raise questions about a company's potential to remain profitable over the long term. The company has a higher cash coverage ratio than is common for its industry. The increasing activity of the firm in FY22 led to a rise in the cash coverage ratio.

 

 

Efficiency and assets management ratios

 

The accounts receivable turnover ratio for Starbucks Corporation was 32 in FY21. This means that Starbucks Corporation was able to increase its credit sales by 32 times in FY21 compared to FY20. In FY22, the turnover ratio for accounts receivable dropped to 30. In FY22, the company's turnover ratio declined as a result of an increase in accounts receivable totaling $235 million. The ratio was higher in FY21 for Starbucks Corporation than in FY22, indicating a more effective conversion of accounts receivable. It took Starbucks Corporation about the same amount of time (between 11 and 12 days) to make up for lost income in fiscal years 21 and 22. When compared to the industry average of 14 days, Starbucks Corporation has credit terms for early recovery from accounts receivable that are competitive.

 Starbucks Corporation's asset turnover ratio grew by 0.13 times, from FY21 to FY22, reaching 1.09 times. That all of the company's resources were put to productive use in earning money. The ratio of Starbucks Corporation's assets turnover to that of its competitors, 0.62, is clearly greater.

 

Profitability Ratios

 

The company's earnings improved. Sales costs increased by the same margin year over year. The company's gross profit increased in FY21, reaching 29% of sales. Gross profit in FY22 was just 25.74%, despite higher sales revenue. This indicates that inflation caused a greater increase in the cost of sales than in revenues. Gross profit margin for Starbucks Corporation was 46.43%, which was lower than the average for all companies.

If a company has a high operational profit margin, it means it can pay its operating expenses, interest, and taxes. Starbucks Corporation had a reduction of 3% in its operating profit margin ratio, from 16.77% in FY21 to 14.32% in FY22. The rise in revenues was not enough to cover the increase in store operating costs and general and administrative expenses. The decline in operating margin in FY22 was the result of higher operating costs compared to revenue growth. The operating profit margin ratio for Starbucks Corporation in FY22 was lower than its competitors' and the industry average of 18.64%.

A higher net profit margin indicates that a greater portion of revenues may be retained after subtracting all expenses and charges. The net profit margin ratio for Starbucks Corporation fell from 3.93% to 2.87% between FY22 and FY20, a decrease of 1.06%. As operating expenses, interest payments, and taxes all went up, net income fell. While the industry average was 11.28 percent, Starbucks Corporation's net profit to sales ratio in FY22 was just 8.5 percent.

When the return on equity (ROE) is high, it means shareholders are making money. The Return on Equity (ROE) for Starbucks Corporation increased to 79.03% in FY21 from FY20, and then fell to 37.75% in FY22, a decline of 41%. Proof positive that Starbucks Corporation was able to increase its investors' returns and net profit in FY22. A return on equity of 37.07% in FY22 puts Starbucks Corporation on par with its competitors and the industry average. This is evidence that Starbucks Corporation has successfully increased its investors' net income.

Valuation Ratios

 

Raising the Return on Equity raises the P/E ratio. The 27.80 P/E ratio that Starbucks Corporation had in FY22 was greater than the average P/E for the retail industry as a whole. However, both the price to sales and price to book ratios for Starbucks Corporation are lower than the sector norms. Companies with higher book values and share prices tend to attract more investors.

Finance industry reporting quality

Accrual ratios for cash flow and balance sheet items provide insight into the extent to which a company's reported earnings may be explained by variables other than operational success or accounting fraud. Citation: (Esther Cheung, 2010)

 

Starbucks Corporation's cash flow-based accrual ratio rose from a negative value in FY20 to a slightly positive one in FY22, according to corporate figures. During FY20–FY22, this ratio dropped from -0.42 to -0.25. This suggests a stronger link between the company's claimed profitability and its cash generation. The balance sheet accrual ratio has improved, implying less accounting trickery. The balance sheet-based accrual ratio increased from -0.06 to -0.04 in FY21–FY22. The ratio has remained negative for three years, indicating that the company is still using intangible assets to generate earnings. Cash flows should be examined to provide a fuller understanding of a company's finances, even while accrual ratios are improving.

This value uses discounted cash flow.

Valuation involves determining a price. Valuation methods extrapolate previous data to predict future price. Starbucks' discounted cash flow is provided. The customized model discounts all cash inflows. Future profits after considering the needed rate of return. We then demonstrate that the book value of the firm (equity + debt) plus the enterprise market value equals the present value of the Cash Value Added discounted at the WACC. Free cash flow discounted at the firm's WACC may determine market value. The discounted cash flow (DCF) method values predictable cash flow companies like Starbucks Corporation (Fernández, 2002). DCF calculations now demand careful consideration of the WACC discount rate. The risk-free rate and firm beta affect the weighted average cost of capital (WACC). Using cash flow estimates, a growth rate, and a discount rate, the model may estimate the company's true worth. Germany J. Vayas-Ortega.

Assumption

The present value to terminal value, enterprise value, and implied share price are all calculated based on projected cash flows over the next five years. Table 2

Starbucks Corporation sales climbed by 9% in FY20, 24% in FY21, 11% with a 2% rise in FY22, and 15% from FY23 to FY27. Starbucks' three-year financial record supports expansion goals. The COVID-19 pandemic dampened recreational activities and tourism, slowing revenue growth in FY20. We anticipate a boom in revenue once the virus abates and travel restrictions are relaxed. Estimates for operating expenses range from 86% of revenue in FY22 to 89% of revenue in FY23-FY27. The historical performance of Starbucks and industry-standard measurements provide support for these hypotheses. The decrease in operational expenses in 2021 and 2022 is the result of the company's reaction to the pandemic, which included the implementation of cost-cutting initiatives. During the forecast period, we anticipate a 30% annual increase in current assets as a proportion of sales and a 29% annual increase in current liabilities. These projections are based on analysis of Starbucks Corporation's financial health during the last three years.

Based on Starbucks Corporation's beta, risk-free rate, and equity risk premium, the Capital Asset Pricing Model (CAPM) calculates its stock price. Based on historical data and normal processes, we calculated a risk-free rate of 4.35%, market rate of 11.15%, market risk premium of 6.8%, and levered beta of 1.14. Under these circumstances, equity costs 12.10%. Table 3

The weighted average cost of capital includes equity cost, loan cost, equity value, and debt value. The cost of debt is 2.27%, valued at 99%, while the cost of equity is 12.10%, valued at 1%. This WAC of capital is employed in the discounting of future cash flows.

We calculated $47.9 per share using a discounted cash flow (DCF) model. It's 57% cheaper than $111.47. Past and current market data supports these beliefs. Investors must constantly remember the risks and uncertainties associated with every estimate or judgment they make.

Consider the Factors

A sensitivity analysis is performed to evaluate the significance of alternative assumptions, the reliability, and the robustness of the primary strategy. Not only do the results of a sensitivity analysis impress one's colleagues and investors, but they also inspire trust in the reader. Currently (Fabrice I. Mowbray 2022),

As seen in the table below, a greater WACC and growth rate decrease inferred pricing value, and vice versa. Even while a greater growth rate increases cash flows, a higher discount rate diminishes their current value. Thus, sensitivity analysis must thoroughly examine these assumptions and assess the range of viable values. Capital expenditures, short-term assets and liabilities, depreciation, and amortization may affect the value.

He estimated growth using historical patterns and future predictions. The CAPM can determine the WACC, a weighted average of equity and debt costs, using a capital structure of 99% debt and 1% equity, a risk-free rate of 4.35%, and market risk of 11%. The company's total debt plus the current interest rate determined its interest expenditure. Dissect and justify every value assumption. Change these assumptions and do a sensitivity analysis.

Conclusions and Recommendations                                                    

Starbucks' North American, worldwide, and channel expansion efforts dominate coffee on three continents. Starbucks Corporation dominates the US market due to their efforts. Starbucks Corporation will invest in our joint efforts and industry-leading digital platform to expand. Statistics show more revenue-generating property, plant, and equipment.  Sales rose in FY22 as the company recovered from the pandemic. Ratio analysis may assess a company's short- and long-term viability. Starbucks Corporation's liquidity is lower than comparable corporations. Long-term solvency makes the company competitive. Firm net profit margin is below average. However, ROA and ROE are above industry norms. Cash flow and balance sheet-based accrual ratios rise in FY2020–2022. A discounted cash flow model calculates the estimated share price. The WACC discounts future cash flows to present value. He estimated growth using historical patterns and future predictions. The CAPM model calculated the WACC using the expected capital structure of 99% debt and 1% equity, 4.35% risk-free rate, and 11% market risk. Predicted value and market pricing are presently 57% apart. The valuation conclusion may depend on the correctness of assumptions, notably growth rate and discount rate. If the actual growth or discount rate differs from the expected one, the calculated price may vary dramatically. The company faces political turmoil, changing rules, and currency rate fluctuations due to its worldwide influence.

 

 

 

 

 

Appendices

Appendix I

Appendix II

Appendix III

Common Size Analysis

Appendix IV

Appendix V

Appendix VI

 

 

 

 

 

 

 

 

Esther Cheung, E. E. (2010). An historical review of quality in financial reporting in Australia. Emerald insight.

Fabrice I. Mowbray, D. M. (2022). Sensitivity Analysis: A Method to Promote Certainty and Transparency in Nursing and Health Research. Canadian Journal of Nursing Research.

Fernández, P. (2002). Three Residual Income Valuation methods and Discounted Cash Flow Valuation. IESE Business School.

Germania Vayas-Ortega, C. S.-R.-L.-Á.-J.-B. (2020). On the Differential Analysis of Enterprise Valuation Methods as a Guideline for Unlisted Companies Assessment (I): Empowering Discounted Cash Flow Valuation. Applied Sciences.

Greenspan, R. (2022). Starbucks Five Forces Analysis (Porter’s Model) & Recommendations. Retrieved from Panmore Institute: https://panmore.com/starbucks-coffee-five-forces-analysis-porters-model

Starbucks. (2022). Starbucks annual report.

Statista. (2022). Market share of selected leading coffee chains in the United States in 2020, by number of outlets.

UKEssays. (2017). Analysis Of Starbucks Strategy. UKEssays.