Term Paper on "Starbucks Company Overview and Financial Analysis"

Term Paper 18 pages (4842 words) Sources: 1+

[EXCERPT] . . . .

Starbucks operates in the quick service food industry, with a coffee specialty. It has a differentiated strategy whereby it sells premium coffee-based drinks, along with food and ancillary products. The company has an international scope, and this geographic diversification has helped it grow into a global power in the coffee industry. Starbucks also loosely competes against other providers of caffeine, a disparate group, but one that at times has benefited from consumer dissatisfaction with Starbucks' prices.

Starbucks has come under intense competition in recent years. Its competitors in the coffee business are almost all significantly smaller by revenue, but in food service it now competes against McDonald's, a much larger company. This has shifted the emphasis at Starbucks from generating revenue from coffee to generating revenue from multiple streams. The company just bought a juice company for a move into both consumer products and into juice shops not unlike the Starbucks coffee shop model.

The company was struggling in 2008, and at the time had been forced to close stores in the United States and all but pull out of Australia entirely. Former CEO Howard Schultz returned to that role. Since that time, Starbucks has demonstrated a strong rebound in its financials. The company's liquidity, profitability and asset management ratios have improved steadily since 2008. At that time, the company was seen as having prices too high, but a slight rebound in the economy has been met with a strong rebound in the Starbucks' revenues. International revenues are part of that growth, with China in particular being a strong growth market that the company intends to pursue strongly over the next decade.

The company's stock price has nearly quadrupled in value since 2008, and this is a reflection of its strong financial performance. In addition to improved returns and operating efficiency, Starbucks also benefits from a low level of debt. The result of this is that the company's profits accrue to shareholders. This has accounted for some of the improvement in the company's stock.

A buy recommendation is issued on Starbucks stock. The company's management has been very strong of late. While this is reflected in its current stock price, that price increase has been justified by strong operating results. Nearly every single important financial ratio has improved in recent years, and this upward trend is encouraging for investors, especially given the lack of debt that the company has.

The buy recommendation also reflects the qualitative value of the company's management team. Starbucks outperforms its competitors in terms of corporate social responsibility initiatives and operating results. The company also has a number of different growth channels that it is pursuing simultaneously -- the juice stores, increased presence in consumer products, in-store improvements and geographic diversification. Its first mover advantage in China will help it to gain share in that country in particular. In addition, the current share price is not even that high on a P/E basis, indicating that relative to its growth prospects Starbucks is probably still undervalued on the market.

Introduction

The purpose of this report is to undertake a financial analysis of Starbucks. The report will focus on the company's most recent financial statements, and make use of a number of different analytical techniques. At the conclusion of the report, there shall be an assessment of the firm's overall financial health, based on the different measures that were discussed.

Starbucks competes in the quick service restaurant industry, using the coffee shop format. Founded in Seattle, Starbucks has grown to be an internationally-prominent coffee shop firm. The company's primary business is its coffeeshops, which feature a variety of coffee drinks and quick snacks. Starbucks also earns revenue from the sale of ancillary products in its shops, and from the sale of coffee on the institutional market (i.e. To hotels, restaurants and grocery retailers). The U.S. market continues to be the strongest for the company, but this market is fast-maturing. The company struggled with growing pains during the middle of the 2000s, as new entrants such as Dunkin Donuts and McDonalds began competing directly with Starbucks, reframing the company's industry and cutting into its margins. Starbucks also failed with a number of diversification initiatives, mostly focused on selling non-coffee goods in their stores. Those efforts have since been scaled back. In addition, Starbucks closed hundreds of underperforming stores in an effort to restore its historical profitability, and that strategy has largely been a success.

Starbucks first expanded internationally in 1987 by moving north in Vancouver. Since then, the company has had a strong international orientation and today has 15,000 stores in 50 countries around the world (Starbucks.com, 2011). Starbucks uses partnerships to expand internationally, and currently views the Chinese market in particular as critical to future growth (Jelter, 2011). Starbucks is also focusing its efforts on other Asian markets in particular, from the Middle East to Japan and Malaysia in an effort to leverage the strong economic growth in the region to deliver superior results.

The analysis of Starbucks' worth as an equity investment can only be analyzed in the context of its current operating environment. The shifts in the environment, when combined with the company's strategy, will be the key drivers of future financial performance. Ultimately, it is the future financial performance that is most important -- past performance is essential for providing context but the value of the company's stock going forward will relate to its future financial performance, not its past performance.

The research questions are going to be answered using a number of techniques. Understanding the history of the company and the nature of its current operations provides a framework for understanding the financial analysis that is the core of the report. The financial analysis itself will have several components -- a ratio analysis, an analysis of the company's stock performance, and an analysis of Starbucks vis-a-vis its competitors.

A conclusion will be drawn as to whether or not Starbucks will be a good investment. A good investment is a firm that has strong potential to deliver returns to the shareholders. A good investment will therefore have a relatively low stock price to its value. The value will be determined by looking at the trends in its financial statements, its liquidity and profitability and the company's qualitative fundamentals including its positioning with the market and its ability to leverage its strengths to take advantage of the opportunities in the market. The analysis will also need to ensure that the company is well-positioned to manage the challenges presented by the current operating environment.

A company that represents a good investment will have a stock price that is in line or better than its industry peers, as the investment decision is assumed to be relative to other firms in the industry. The financial analysis should reveal a firm that performs better than or equal to its peers. The key is that in order for an investment recommendation to be made, the reader must have an understanding of how Starbucks has performed, how it is likely to perform and how it performs in relation to its key competitors.

Statement of Purpose

The desired outcome of this analysis will be an investment recommendation for Starbucks. The recommendation will either be "buy," "sell" or "hold," depending on the outlook for the company in the coming year.

This paper will evaluate the financial health of the company and undertake a qualitative analysis of the company relative to its competitors. This will allow for a determination to be made with respect to the Starbucks' value to the equity investor.

Overview of Starbucks Company

Starbucks began life as a coffee vendor at the Pike Place Market in Seattle in the early 1970s, but the modern Starbucks only came into being in 1987 when the company was purchased by a former employee, Howard Schultz, who was running a small chain of coffeeshops already. The company began its rapid expansion almost immediately. The initial focus of expansion was on building out a network of coffeeshops. Two ownership models were used -- franchises and company-owned stores. When the firm expanded to Asia, it utilized a slightly different ownership model featuring the licensing of the name and systems to local food-service companies. The company expanded into Japan in 1995 because of that country's high level of disposable income and affinity for Western brands (JETRO, 2006). The model for success in Japan -- not a traditional coffee-drinking country -- has become the company's model for a number of overseas ventures, especially throughout the Asia-Pacific region. Starbucks emphasizes being a "third place" away from work and home, and this attracts customers. The company has also demonstrated flexibility in its menus overseas as well, to reflect the tastes of local consumers.

Since Schultz took over the company, Starbucks has been on a long-term growth trajectory. There have been, however, some bumps along the way. The company has failed in at least two markets -- Israel and Australia -- because of its inability to adapt to the challenges of local market… READ MORE

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