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Running Head: STARBUCKS CORPORATION ANALYSIS

Final Project MBA-503 Financial Accounting and Analysis Dr. Bruce W. Frey Southern New Hampshire University February 13, 2021.

Table of Contents

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STARBUCKS CORPORATION ANALYSIS

I. Introduction..................................................................................................................4 II. Methodology................................................................................................................5 III. Results.........................................................................................................................6 IV. Discussion...................................................................................................................8 a) Accounts Receivable…………………………………………………….……….8 b) Asset Acquisition, Depreciation, and Amortization………………………….….9 c) Debit financing………………………………………………………………….11 V. Ratio Analysis ……………………………………………………………………..12 a) Liquidity Ratio………………………………………………………….12 •

Results ……………………………………………………..........13

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Discussion……………………………………………………….13

b) Solvency Ratio …………………………………………………………..14 •

Results ……………………………………………………..……15

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Discussion…………………………………………………..……15

c) Profitability Ratio …………………………………………………..……17 •

Results …………………………………………………...………17

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Discussion …………………………………………….…….....…18

VI. Control Procedures……………………………………………………………...….....19 VII.

Segment Information………………………………………………….………21

VIII.

Estimates and Assumptions…………………………………………………..22

IX. Investments and Fair Value …………………………………………………………23 X. Leases………………………………………………………………………………...24

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STARBUCKS CORPORATION ANALYSIS XI. Conclusion……………………………………………………………………………25 XII.

References ……………………………………………………………………27

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STARBUCKS CORPORATION ANALYSIS

I.

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INTRODUCTION

The Starbucks Corporation is an American multinational chain that hosts the name of the largest coffeehouse in the world. In 2020, the company operated in over 30,000 locations worldwide in 76 countries. Its founder's Jerry Baldwin, Zev Sigel, and Gordon Bowker created the company in 1971; back then, the company was located in a single storefront in Seattle's historic pike place market. In 1981, Howard Schultz (Starbucks chairman and chief executive officer) first walked into a Starbucks store. From his first cup of Sumatra, Howard was drawn in by Starbucks and joined the franchise a year later (Bondarenko, 2019). Starbucks has garnered a cult following from the public, as it symbolizes a melting pot for different individuals who share a common love for coffee. Starbucks is more than just a coffee house. The company's mission is to inspire and nurture the human spirit, one person, one cup, and one neighborhood at a time (Harrison, Horngren, & Thomas, 2015). This multinational cooperation is not only the lead within its sector; they are a landmark, as they have raised the bar, by venturing into new, untested sectors and countries, giving new businesses a road map to follow through: We knew we were onto something when we decided to open our first international coffeehouse in Tokyo back in 1996. The response was extraordinary, and to this day, we're still amazed by how warmly our coffee shops have been embraced by millions of people around the world (Starbucks, 2020). The purpose of this analysis is to assess Starbucks' financial prowess by examining their performance within the most recent years, and highlighting their strengths and weaknesses to

STARBUCKS CORPORATION ANALYSIS obtain an essential roadmap, which will lead Coffee Connection to a higher profitability market, and help in expanding the business. Firstly, I shall utilize the horizontal and vertical financial analysis tools to examine the accounts receivable, assets, and debt financing by analyzing Starbucks' financial efficiency. I will then examine and interpret my final results while reviewing my findings from the data report. Secondly, I shall conduct a ratio analysis based on liquidity, solvency, and profitability. Then I will interpret the data of Starbucks ' financial performance. Lastly, I will examine critical GAAP reporting requirements mandated for Starbucks to follow and include in their financial statements. My research aims to determine Starbuck's financial health and profitability through 2018, 2019, and 2020; to gain a reliable benchmark to improve and expand Coffee Connections operations. With my findings, Coffee Connection will be able to make strategic orders that will render the company into a stable and profitable financial pathway.

II.

METHODOLOGY

This financial information was compounded with the use of two different methods of research, namely: •

Qualitative Method: the secondary source of data used for this paper included the official Starbucks website and the U.S Security and Exchange Commission website. I used these sources to obtain the company's annual report for the fiscal year ending in 2020.

•

Quantitative Method: I used the Microsoft Excel software to create both a vertical and horizontal analysis of the income statements and Starbucks' balance sheet.

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STARBUCKS CORPORATION ANALYSIS Horizontal Analysis. This is used in financial statement analysis to compare historical data, such as ratios over a number of accounting periods. It is the study of percentage changes from year to year. It can either use absolute comparisons or percentage comparisons, where the numbers in each subsequent period is denoted as a percentage of the amount in the baseline year (Tuovila, 2020). Horizontal analysis allows financial statement users to quickly spot trends and growth patterns (Harrison, Horngren, & Thomas, 2015). The formula of % Change= Dollar Amount of Change / Base year amount* 100 Formula of $ Change = $ New year - $ Old Year Vertical Analysis Vertical analysis is a financial statement analysis method that presents each line being offered as a percentage of a base figure within the financial statement. The vertical analysis makes it easy to comprehend the relationship between single items on a balance sheet and the bottom line, expressed in a percentage (Grant, 2020). The vertical analysis makes it much easier to compare one company's financial statements with another and across industries. This tool shows a financial-statement item's relationship to its base, which is the 100% figure (Harrison, Horngren, & Thomas, 2015). Vertical analysis % = Each income statement item/ Net sales (revenue)* 100

III.

RESULTS

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STARBUCKS CORPORATION ANALYSIS

Figure 1: Vertical and Horizontal Analysis of the Income Statement on Microsoft Excel

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STARBUCKS CORPORATION ANALYSIS

Figure 2: Vertical and Horizontal Analysis of the Balance Sheet on Microsoft Excel

IV.

DISSCUSSION

a) Accounts Receivable

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STARBUCKS CORPORATION ANALYSIS •

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The horizontal analysis in accounts receivable between 2020 and 2019 indicated no increase or decrease in the account (0%), clearly stated in the drop in dollar amount in millions by $4.2 million.

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The vertical analysis for accounts receivable displays a decrease of 2% (5% in 2019 decreased to 3% in 2020)

•

Within accounting receivables between the years of 2020 and 2019, both vertical and horizontal analysis decrease the account. This result is positive as it indicates that the company collected old accounts receivable (credit sales converted into cash sales), which helped present cash inflow for the company. All money being owed is being paid immediately as it is indicated during the current period from the vertical analysis and through the years from the horizontal analysis.

•

With Starbucks accounting receivables, they utilize allowance for doubtful accounts receivable (bad debts), a contra account that reduces the balance of the company's gross accounts receivable. These account nets against the total reliable presented on the balance sheet, it reflects only the amounts expected to be paid. The allowance for doubtful accounts is a contra asset account that records the number of receivables expected to be uncollectible. Starbucks allowance for doubtful accounts is calculated based on historical experience, customer credit risk, and application of the specific identification method. With this accounting method, you estimate, which could lead to an underestimation or overestimation of the net income to the reality on the financial statement. With this, the financial statement cannot be reliable.

b) Asset Acquisition, Depreciation, and Amortization

STARBUCKS CORPORATION ANALYSIS •

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The horizontal analysis for fixed assets shows a -3% decrease in fixed assets between the periods of 2019-2020. Simultaneously, the vertical analysis indicates that the fixed assets in 2019 were more than that of 2020 by 12% (33% in 2019 and 21% in 2020). With this, Starbucks notably invested more in fixed assets in 2019.

•

Intangible assets are considered physical, such as Goodwill, brand recognition, intellectual property, etc. The horizontal analysis indicates that there was a -42% decrease in intangible assets (excluding Goodwill). Additionally, vertical analysis suggests a 2% decrease within the years (2% in 2020 and 4% in 2019). However, horizontally Goodwill shows a 3% increase within 2019- 2020. However, the vertical analysis indicates Goodwill within the year 2019 was higher than in 2020 (12% in 2020 and 18% in 2019). The information shows that the company has not been investing in intangible assets over the years.

•

With the depreciation and amortization expenses, the horizontal analysis indicates neither an increase nor decrease in the periods of 2019-2018 and 2020-2019. The vertical analysis shows an increase of 1% from 2019 to 2020. As noted earlier, these numbers indicate the lack thereof fixed and intangible assets within the years of 2019 and 2020.

•

Fixed assets are items purchased for long-term usage and are not likely to be converted into cash; this includes land, property, and equipment. While intangible assets are nonphysical, they can consist of trademarks, copyrights, and software. Depreciation is a method of allocating the cost of a tangible or fixed asset over its useful life or life expectancy. Starbucks makes use of the straight-line depreciation technique; it is calculated by dividing the difference between an asset's costs and its expected salvage value by the number of years it is expected to be used (Liberto, 2020). While

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amortization is a method used to periodically lower the book value of a loan or an intangible asset over a set period. These two methods are imperative when calculating an intangible and fixed asset's value on the balance sheet and reflecting their expenses on the income statement. Depreciation and amortization are not included in the cost of goods sold and are expensed as separate line items on the income statement. Additionally, as depreciation and amortization are non-cash expenses, they do not directly affect the business's cash flow. However, indirectly, it changes its tax liabilities, which reduces cash outflows from income taxes.

c) Debt financing •

The horizontal analysis indicates an increase in short-term debts between 2019 and 2020 by 16% (1178.1 million dollars). With this increase in short-term debt in one year (20192020), there are various reasons for this spike: bank loans, accounts payable, income taxes payable, etc.

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The vertical analysis shows a decrease in short term debts by 4% (24% in 2019 and 20% in 2020). This indicates a movement in the right direction in the current year 2020.

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The horizontal analysis indicates an increase in the long-term debt by 24% (3492.6 million dollars)

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The vertical analysis shows a decrease in long term debts by 5% (44% in 2019 and 39% in 2020). It can then also be noted that the company is doing well in handling its liabilities within the year 2020.

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Both short-term and long-term debt analysis indicates an increase in the horizontal and a decrease in the vertical. The increase in debt should not be misconstrued, as both

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increases were incremental (below 20%). This increase is most likely attributed to the purchasing of new equipment and increased store locations and employees. With running a global company, there are bound to be incremental increases over the years. As the motto goes, you have to spend money to make money, and they are making considerable profits from the business. For methods of debt financing, Starbucks uses investment capital and loans. Additionally, account payable and cash flow from debit and operations are other company debt financing methods. Furthermore, in 2019 Starbucks completed an issuance of a $1 billion Sustainability Bond that supports ethical coffee sourcing and its Greener Retail initiative. This being their largest bond issuance, has attracted significant investors due to the opportunity to participate in its sustainability efforts. Starbucks has partnered with responsAbility Investments AG, an asset manager in development investments, on a $20 million investment to provide debt financing to coffee producer organizations in Latin America, Africa, and Asia (Starbucks Completes Issuance of Third and Largest Sustainability Bond 2019).

RATIO ANALYSIS Ratio analysis is a quantitative method used in gaining insight into companies' liquidity, operational efficiency, and profitability. It marks out how a company is performing over time while comparing it to another within the same industry or sector. The analysis offers a glimpse of what is happening in the company and helps its owners in making financial decisions regarding the company's health. In this case, Coffee Connect is analyzing Starbuck’s financial health to gain insight into their competition, as it would help form a benchmark to improve the (Coffee Connect) company's profitability levels.

STARBUCKS CORPORATION ANALYSIS

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a) LIQUIDITY RATIO The liquidity ratio is an essential financial metric used in determining a company's ability to pay its current debt obligations without raising external capital. This ratio can be measured with the current ratio, acid test ratio (quick ratio), operating cash flow ratio, and days of sale outstanding ratio. The higher the ratio, the more advantageous the company's liquidity position level. I shall only be utilizing the current ratio and the acid test ratio for this paper (Hayes, 2020).

•

RESULTS

LIQUIDITY RATIOS

Sept. 27, 2020

Sept. 29, 2019

Current Assets

7806.4

5653.9

Current Liabilities

7346.8

6168.7

Current Ratio = Current

1.06255784831

0.91654643604

Cash & Cash Equivalents

4350.9

2686.6

Short-Term Investments

281.2

70.5

Accounts Receivable

883.4

879.2

Current Liabilities

7346.8

6168.7

Acid Ratio = (Cash & Cash

0.75073501388

0.58947590254

assets/ Current Liabilities

Equivalents + Short-Term Investments + Accounts

STARBUCKS CORPORATION ANALYSIS

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Receivable)/ Current Liabilities

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DISCUSSION

The current ratio metric compares a company's current assets to its current liabilities. It informs investors and analysts how a company can maximize its current assets, on its balance sheet to satisfy its current debt and other payables. The current ratio of Starbucks Corp. has improved over the year, and it lies almost within the industry standard, which is 2. The current ratio (1.06) indicates that Starbucks can pay off all its current liabilities with its current assets. However, the company must improve its standard, as the higher the ratio, the more favorable their liquidity position. Quick ratio (acid test ratio) shows a company's capacity to pay its current liabilities without selling its inventory or obtaining additional financing. The quick ratio is deemed a more conservative measure than the current ratio, including all current assets as coverage for current liabilities (Kenton, 2021). Starbucks acid ratio (0.7507) is below their industry-standard (one). As the numbers indicate, Starbucks' current assets are stuck in low liquid assets like prepaid expenses or inventory. The acid-test ratio can display how misleading the current ratio can be, as for Starbucks, the acid test score for 2020 was below zero (0.7507) and their current ratio for the same year was above one (1.0625), this shows that the company's assets are highly dependent on the inventory. With this, they need to focus on assets that can be easily converted into cash; this will also help them improve the corporation's quick ratio. Using this metric, potential investors and creditors can determine if they would want to risk investing within their business. With these numbers,

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Starbucks Corp presents a high-risk, low reward venture for future investors. Furthermore, the current ratio of Starbuck's primary competitor, McDonald's, is at 1.07, and the quick ratio also remains at 1.07(this is due to McDonald's not having inventory, this means to compare both companies, the current ratio provides a more accurate analysis) (Macrotrends, 2020). Even with this, Starbucks is still performing at a lower level than their competitors within the same industry.

b) SOLVENCY RATIO Solvency ratio, like liquidity ratio, is a metric used in measuring a business's ability to meet long-term debt obligations. This metric indicates whether a company’s cash flow is sufficient to meet its long-term liabilities. The main solvency ratios include the debt-to-assets ratio, the interest coverage ratio, the equity ratio, and the debt-to-equity ratio. However, for this analysis, I shall be focusing on the debt to assets and debt to equity ratio (Kenton, 2020). •

RESULTS

SOLVENCY RATIOS

Sept. 27, 2020

Sept. 29, 2019

Total Liabilities

37173.9

25450.6

Total Assets

29374.5

19219.6

Debt to Assets = Total

1.26551600878

1.32420029553

Total Equity

-7799.4

-6231

Debit to Equity = Total

-4.7662512501

-4.08451291927

1164.4

4466.2

Liabilities/ Total Assets

Liabilities/ Total Equity EBIT

STARBUCKS CORPORATION ANALYSIS

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Interest Expense

-437

-331

Times Interest Earned =

-2.66453089245

-13.4930513595

EBIT/ Interest Expense

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DISCUSSION

The Debt-to-asset ratio, also known as the debt ratio, is a leverage ratio that indicates the percentage of assets financed with debt. The higher the ratio, the greater the degree of leverage and financial risk. Creditors and analysts commonly utilize this metric in deter...