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Abstract
Starbucks is one of the leading retailers for beverages and their respective products such as coffee and tea and this can mainly be attributed by their financial and business strategy. Therefore, this discussion seeks to evaluate some of the common financial aspects by comparing the company’s financial performance in 2017 vis-à-vis 2018 hence determining some of the aspects which made the company improve financially in these subsequent years. As a result, this assessment will implement horizontal and vertical analysis, ratio analysis, as ell s the rules for reporting the financial report. Overall, it is worth noting that the financial strategy of the company has played a big role in ensuring its success.
Introduction
Starbucks is a coffee company whose business story started in 1971 when they only roasted and retailed whole bean as well as grounded coffee, spices, and tea at a store in Pike Place Market, Seattle. However, the growth of the business has been successful for the company since then and currently, the company has over 24,000 retail stores across 70 nations and as a result, they have been in a position to connect with their customers by selling their high-quality products (Starbucks, 2019). Starbucks has over the past decades been one of the most profitable competitors in the coffee industry and service sectors. It has demonstrated and maintained successful profitability in its undertakings and a consistent growth rate evident by the incessant global store openings. As a matter fact, the capacity and ability of Starbucks to contend with the vulnerability of the ever-present financial threats such as the rise in global competition, economic recession as well as high-interest rates are what has given many investors the courage to continually pump more money into the business(Starbucks, 2018). Moreover, Starbucks has clearly shown an astound brand image, exceptional customer service and undoubtedly Increase in product innovations.
One of the major ways that can be used to accurately evaluate Starbucks ‘vulnerability is using its financial performance and analysis on its threats, strengths, opportunities and weaknesses (KPMG, 2017). Based on the company’s success over the years, it is crucial to analyze some of the financial aspects of this company because that is one of the crucial components that ensure the success of the company. This paper, therefore, focuses on the financial ratios analysis for the company to establish its true position in the market as of the current market shifting trends.
Horizontal and Vertical Analysis
According to Harrison et al. (2017), the assets which have been retrieved as the accounts receivable, they are acquired from the sale of goods and services by a company to its consumers. Therefore, according to the horizontal analysis for Starbucks, their accounts receivable were increased by 6.92% as of 2017 which translates to about $719 million vis-à-vis the $768.8 million in 2018. The goods and services for his company were recognized as Consumer Packaged Goods (CPG), money from the royalties, as well as that from the sale of their food services. Moreover, the allowance for the doubtful accounts was based on customer credit, historical experience, as well as the implementation of particular identification strategies. On the other hand, vertical analysis shows that as much as the net receivable accounts as well as the entire current assets have grown compared to the past year, the accounts receivable’s a percentage which is the percentage of the entire current assets reduced by about 2%. Therefore, this is an indication that Starbucks got more payments on their lines of credit and that of its goods. Additionally, in 2018, it was reported by the company that two of their long-term debts were underwritten through a registered public offering. For instance, one amounted to $500 million at 2.1% for 5 years was reopened thus adding $250 million in February while another one in May which had $500 million at 2.45% for 10 years.
The intangible assets, fixed assets, amortizing, and depreciation is some of the common areas which can be assessed through horizontal and vertical analysis. For instance, horizontal analysis has revealed that in 2018 there was an increase in the fixed assets by 10.9% compared to 2017 (from 4088.3 to 4533.8 million dollars). For the intangible assets, there was an increase of 6.68% whereas the depreciation and amortization heightened by 10.31%. From the vertical analysis perspective, the fixed assets were shown as a percentage of the entire assets and comparing to 2017, they decreased from 32.92% to 2018’s 31.64% hence evidencing a 1.28% decrease. Additionally, between 2017 and 2018, the intangible assets decreased from 16.88% to 15.6%. The assets under lease included the Property, Plant and Equipment hence considered as necessary costs which had to be used inclusive of labor and overhead. Additionally, the consolidated statements of earnings showed depreciation expenses and maintenance costs which prolonged asset lives. Moreover, impairment because of irreparability or irrecoverable nature of an asset was inclusive of the company’s depreciation assessment. Lastly, the determination of goodwill is done through impairment because of closure as well as a site’s or store’s low performance which is considered as an asset. Between 2017 and 2018, goodwill for the company increased from 1575.4 to 1719.6 million dollars hence playing a contributory role in increasing the company’s assets which positively influenced the cash flow of the company throughout 2018 (Starbucks, 2017; Starbucks, 2018).
Assessing Debt Financing from horizontal assessment, it is evident that there is an increase in the short and long-term liabilities between 2017 and 2018 such that it is 24.63% and 36.40% respectively. It is clear that a 2013 credit facility was replaced with a $1.5 billion and it was unsecured with up to $150 million that was utilized in the letters of credit. Based on the vertical assessment, it is evident that there was a marginal decrease in the short-term liability between 2017 and 2018 which have 55.3% and 53.8% hence revealing a 2.36% increase between these years (Starbucks, 2017; Starbucks, 2018). Therefore, looking at the horizontal and vertical assessment for the company with a comparison of the annual reports for 2017 and 2018, it can be deduced that the company created strategic debt and asset policies as well as decisions that heightened the 2018’s net income. Moreover, with the recent change in their leadership such as their CEO, the company was in a state where this decision would positively or negatively influence aspects such as liabilities and debts in the subsequent years.
Ratio Analysis
Liquidity Ratio
This is a measurement of the organization’s debt obligations as well the ability to meet these obligations hence it used to establish whether an institution can be in a position to meet their obligations any time. Therefore, for the case of Starbuck, the ratios used to establish their liquidity are the Current Ratio and Quick Ratio. The current ratio was achieved by dividing the current assets by their current liabilities of Starbucks and this is one of the straightforward cash flow ratios that can demonstrate the current assets of a company hence being in a position to meet its debt obligations. Based on calculations for the company’s current ratio for 2017 and 2018, it was determined that the 2017’s ratio was 1.19 whereas that of 2018 was 1.05 (Starbucks, 2017; Starbucks, 2018). Normally, 2:1 is the most preferred benchmark ratio hence revealing the deterioration of the current ratio between 2017 and 2018. Contrary, the Acid Test was computed using the formula
Quick Assets (current assets-inventory) / Current Liabilities
In the above ratio, inventory is removed from the equation hence asserting that the Quick Ration computes the capacity for the company to cover the existing debts in case there is no inventory and as a result, the preferred benchmark for this ratio is 1. Consequently, the results from 2017 and 2018 were determined to be 0.64 and 0.67 hence asserting that these two years offered adverse liquidity outcomes even though 2018 had an improvement. Therefore, based on the company’s liquidity, Starbucks is not in a good position when it comes to liquidity hence cannot meet the short-term debts.
Solvency Ratios
This ratio applies liabilities and assets and as a result, focuses on the debt of the organization hence giving a long-term perspective of the company’s liquidity. Therefore, this ratio was calculated by using the Debt to Assets (Total Liabilities/Total Assets) and Debt to Equity (Total Liabilities/Total Assets). Debt to Asset Ratios computes the amount of assets a company has that have been financed through debt. Consequently, there was an advancement between 2017 and 2018 which shows that there is an increased debt that was used to finance the assets of this company. Thus, this move can be a risk factor for Starbucks by affecting the cash flow which cannot pay the interests. Moreover, the Debt-Equity for 2017 and 2018 were 0.4 and 0.61 respectively hence revealing the amount within the company that is owned by investors and as a result, the increase is an indication of growth in the organization’s utilization of debt in financing its operations. As much as these ratios are not high risk, the increase between the years is a concern to the company and it is important for the company to improve some of its operations by reducing the use of debt to finance their operations.
Profitability Ratios
It is used to measure the capacity for the company to create profits, differentiating the performance of the company for the past years, as well as to measure the earnings on the basis of the expenses and revenue generated by the company. For example, the ratio can be found by comparing the profits of the company within the same quarter as in the past year as well as comparing their competitor’s profits. Therefore, the company’s profitability was attained through the calculation of the Net Profit Margin Ratios and Return on Equity Ratios whereby the former will measure the net profit after paying the expenses while the latter will measure the return on investment that was put in this company. Therefore, the Net Profit Margin Ratios is calculated using the equation Net Income/Sales while that of Return on Equity Ratio is Net Income/Total Equity. The higher percentage on the Return on Equity Ratio reveals a favorable outcome to the investors because the company is doing well. The Net Profit Margin for 2017 and 2018 were 14.39% and 38% respectively (Starbucks, 2017; Starbucks, 2018). The Return on Equity Ratio for 2017 and 2018 were 47.39% and 47.89% respectively hence showing a slight increase in profitability hence no loss incurred for the investors.
Financial Reporting Rules
The Generally Accepted Accounting Principles (GAAP) entails a group of both financial as well as accounting reporting specifications for the public and private organizations. Reflecting on these standards with Starbucks various aspects of the report can be assessed (Financial Accounting Foundation, Inc., 2013). It is worth noting that the names, as well as standardization protocols, can differ in different aspects internationally and as a result, this evaluation on Starbucks will focus on America’s GAAP. Additionally, for public organizations, the Securities and Exchange Commission (SEC) will guide GAAP’s application across the US. Therefore, this discussion will reflect on Starbuck’s report based on control procedures, leases, estimates, segment information, as well as investment and fair value.
Control Procedures
These entail the protocols and policies that have been developed so that they can be followed by various companies in enhancing ethical reporting as well as reducing the chances of having illegal and dishonest financial reporting by organizations (AICPA, 2014). Therefore, it is important to have accurate and ethical reporting from a stakeholder’s point of view such that it would be easy to perceive how the organization is recognized before its creditors, investors or the public in general. For instance, some of the control procedures which have been previously executed by organizations entail compliance observation, the required approval process, monitoring of compliance, as well as separating personnel’s duties. As a result, it is GAAP standard for companies to have their control procedures in place and this can be monitored by SEC. Moreover, the 2002’s Sarbanes-Oxley Act was implemented by Congress so that investors can be protected from illegal accounting and financial reporting. Thus, this act has given controls and procedures the mandate to provide accurate and ethical reporting in the company’s finances. This is because it is important to demonstrate that a company is equipped with solid protocols as well as checks and balances for the sake of upholding financial integrity throughout the company’s operations. As a result, based on Verleun, Sotiropoulos, & Vasileiou (2011) the 1934’s Sarbanes-Oxley Act and the Securities Exchange Act, Starbucks disclosed their controls and procedures that have been used in the process of reporting to their investors as well as the public and these control procedures were considered to be effective and within their mandate. Additionally, the company also unveiled a proper formality for receipt authorization, comprehensive maintenance of financial records, independent audit papers and compliance, as well as their compliance report (Starbucks, 2017; Starbucks, 2018). Upon an independent audit, it was discovered that the company had an effective internal control within their financial reporting and accounting protocols.
Segment Information
This aspect is the division of the operations within a business hence developing the operating subsets in a company that generates revenue. It is important to have segment information for public companies so that there can be details about a company’s financial performance as well as the outcomes of every operating sector for the investors and creditors of the company (Accounting.com, 2019). Segment information can also be crucial for executives and managers through their decision-making processes when there are divisions that are not performing as required hence coming up with strategies for allocating and reassigning resources to the necessary divisions. In the 2018 financial report, Starbucks found 4 operating segments including the Americas and Europe, Channel Development, Middle East and Africa, as well as the Pacific. In this case, the Channel Development is used for the sale of ready to drink coffee products as well as packaged coffee to their retailers whereas the other 3 operating segments sold packaged coffee, coffee, food merchandise, and other forms of beverages. Moreover, based on the report given by the company, their revenue reports were based on the type of product and their assessment and they were also able to report on the outcomes in every segment they owned in terms of operating expenses vis-à-vis their revenues.
Fair Value and Investments
Fair value is considered as the amount which business is capable of settling for the amount the company can make from the sale of its assets. This specification entails the amount needed for the business to settle a given liability based on the amount the company will sell its assets. Therefore, according to the specifications under GAAP, there is a 3-level system for liabilities and assets which have to be established and put on record (KPMG, 2017). For Starbucks, these 3-level methods that have been used in reporting the fair value include the cash value of active markets which are similar, the availability or lack of prices and the last level is established by the application of the intangible assets, property value, and goodwill through the developed model of valuation for the company. Additionally, it is important to have investments since they can reveal the prices and cost to the reader in times when there is buying, transferring, and selling of liabilities. Therefore, in their report, Starbucks revealed their investments such as the short-term and long-term investments which are ready for sale and recorded at fair value. Moreover, there is additional information about the investments which is revealed by the company and it entails trading equities as well as securities together with the cost method investment.
Estimates and Assumptions
Under the GAAP specifications, the managers in the company need to come up with assumptions and estimates according to their liabilities, assets, expenses, as well as revenue (KPMG, 2017). Therefore, the estimates and assumptions utilize performance as well as data for evaluation, allocations, and decision-making processes for a company. It is worth noting that the estimates and assumption could or could not be similar to the actual results in a report thus the need to make future prospects on the basis of the previous financial performance of an organization. In the 2018 financial report, it was revealed that the company’s estimates, as well as assumptions, are part of the financial statement as required by the GAAP standards and as a result, they were based on elements such as assets, prospective taxes, and inventory reserves, unredeemable value.
Leases
It is imperative to have a reporting on leases considering the different degrees as well as the forms of leases which are available and used by the company. For instance, operating leases are based on contract agreements for utilization and assets although they are not company owned while the capital leases are signified through the transfer of ownership (International Financial Reporting Standard, 2018). It is important for the investor or the interested party to be in a position where they can differentiate the various types of leases so that they can be able to establish the value of liabilities vis-à-vis assets which can also be one of the standards developed under the GAAP. In the annual financial reports, Starbucks unveiled the variation in their lease agreements whereby the financial statements are explicitly listed. For instance, the operating lease which has scheduled escalation of rent, the organization has stipulated the methods to be applied such as straight-line as well as in the cases with listed adjustments such as a consolidated balance sheet.
Conclusion
According to the analysis on Starbucks to unravel its financial status, it is important to consider the when and how during the process of deciding about the expansion of business in the coffee market hence ensuring that the assets are superior compared to the liabilities. For instance, the company made the decision to partake in considerable debt offering in the past years and this affected them by heightening the liabilities. However, it can be noted that the company’s inventory, as well as assets, were the contributory factors towards the company’s capacity to make net profits and as a result, did not bring any losses to the investors thus being a big prospect for the coming years. Therefore, this can be attributed by the longevity of Starbuck’s strategic financial moves which the company has committed on together with various changes and decisions made along the way to guarantee optimal profitability.
References
Accounting.com. (2019). What is GAAP? Retrieved from https://www.accounting.com/resources/gaap/
AICPA. (2014). The importance of internal control in financial reporting and safeguarding plan assets. Retrieved from https://www.aicpa.org/content/dam/aicpa/interestareas/employeebenefitplanauditquality/resources/planadvisories/downloadabledocuments/plan-advisoryinternalcontrol-hires.pdf
Financial Accounting Foundation, Inc. 2013). FASB US GAAP Financial Reporting Taxonomy Implementation Guide Series.
Harrison, W. T., Horngren, C. T., & Thomas, C. W. (2017). Financial accounting. Boston: Pearson.
International Financial Reporting Standard. (2018). IFRS 16 Leases. RETRIEVED FROM https://www.ifrs.org/-/media/project/leases/ifrs/published-documents/ifrs16-effects-analysis.pdf
KPMG. (2017). Accounting policies, judgments and estimates. Retrieved from https://home.kpmg/content/dam/kpmg/pdf/2018/07/1-aci-account-policies-juge-estim-fs-uk-v11-lr.pdf
KPMG. (2017). Fair Value Measurement. Retrieved from https://home.kpmg/content/dam/kpmg/pdf/2017/12/fair-value-qa-2017.pdf
Starbucks. (2019). Starbucks Company Profile. Retrieved from https://www.starbucks.com/about-us/company-information/starbucks-company-profile
Verleun, M., Sotiropoulos, I., & Vasileiou, K. (2011). The Sarbanes-Oxley Act and Accounting Quality: A Comprehensive Examination. DOI: 10.5539/ijef.v3n5p49
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