Financial Statement Analysis For Global Redesign Of Starbucks Stores

Financial Statements

Discuss about the Financial Statement Analysis for Global Redesign of Starbucks Stores?

When you need coffee to start your day, then the options are nearly limitless. Dunkin Donuts and Starbucks Corporation are the 2 largest companies that specialize in providing coffee in the USA. Both the companies has similar menus and strategies, but the difference between the two of them is in their branding, store ownership and scale. Starbucks Corporation was founded 20 years after Dunkin Donuts but then also it grew aggressively and is now larger company as compared to Dunkin Donuts. 
Although the growth of Outlets like McDonalds other brands, Starbucks or Dunkin Donuts grabs a good chance. The two big players, who control over half of the coffee market in U.S., are fighting ever-growing competitors.

Starbucks and Dunkin’ Donuts co-existed for long back when Dunkin’ donuts were all about to serve the donuts (Mullins, 2009). But after the retirement of Fred the Star Baker in the 1990s, Dunkin Donuts started growing its coffee business, bringing Dunkaccino in the year 2000 and espresso revolution in the year 2003.

Dunkin’ Donuts slowly started new coffee drinks, and in the year 2006, declared to go one-on-one with Starbucks.

In the year 2015, Starbucks provided good returns with their stocks up over 50%. On the other hand Dunkin’ Brands gained a modest 2.4% over the same stretch. Since earlier performance does not guarantee future returns, and the investment decisions should be based on forward-looking approach.

Regarding the revenue, Dunkin’ Brands is way smaller than Starbucks. Though the smaller size of the company can make it more unstable and volatile, but it provides more chances for expansion (Nissim & Penman, n.d.). It’s becoming easier to withstand rapid growth in a smaller revenue base, which could become an advantage for investors of Dunkin’ Brands v/s Starbucks. As Starbucks operates in its stores, therefore it has constricted margins as compared to Dunkin’ Donuts. The Profit after the cost of sales, including occupancy costs and product expenses, was 84% for the Dunkin’ Brands for the quarter June 2015, Whereas Starbucks had 62% gross margin during this period. The operating margin of Starbucks is 17.5%, which is almost more than 26 % points lower that of the Dunkin’ Brands. Dunkin’ Donuts also has a lower capital expense as compared to Starbucks. Dunkin’ Donuts’ spend $14.6 million in the expense in capital in the 2nd quarter of the year 2015 which was 32% of the net cash flow and 8% of the revenue. Starbucks’ $945 million of the expenses in capital was 19% of the revenue and 34% of the net cash flow from operation. This discrepancy is because of different store possession structures of both the companies, and it is important for the investor to make decision about the investment to be made in the above companies.

Balance Sheet Analysis

Investors must also note the difference in capital structure of both the companies. The long term debt of Dunkin’ Donuts is $2.5 billion which represents 75% of the total assets whereas the long term debt of Starbucks is $2.4 billion which represent 18% of total assets.

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 Dunkin’ Brands had net income declined by 4% during the last quarter because of loss on extinguishment of refinancing and debts.  High debt could cause a huge amount of interest expenses that could hamper the long-term profitability and the cash flow.

Dunkin’ Brands’ free cash flow is negative $2.9 million in the last quarter, which was $34.9 million during the same time of the last year. The Improvements

were due to favourable changes in operating liabilities and assets and high net income (Ferranti, 2003).

Dunkin’ Brands balance sheet is highly leveraged, and the cash balance are at 53% of the stockholder’s equity and the long-term debts to the equity ratio is at 461%. Its Operating income is more than its interest expenditure by almost four times while the rule for the safety is atmost five times. Presently Dunkin’ Donuts pays to its shareholders $0.95 PS  every year, and it yields 3% yearly.

Starbucks experienced vigorous year to date net income and revenue expansion, growing 18% and 11% respectively.  Starbucks free cash flow is in the negative range because of a onetime litigation charge and without litigation charge, the free cash flow would have grown 44%.  Starbucks balance sheet is excellent with stockholder’s equity and cashes 41% and 30% respectively. The Operating income is more than the interest expense by 47 times. Presently the company is paying its shareholders $1.05 (PS) each year, and its yields are 1.6%.

However,” Starbucks has beaten Dunkin’ donuts in relations of the revenue increase in last many years.

Starbucks continues to lead Dunkin’ Brands about sales revenue according to the latest financial reports. One of the Seattle-based company reported $4.9 billion in sales revenue during September quarter, which is a big increase of almost 18% from the similar period last year. Global sales grew up to 8%, with increasing traffic 4% every year, which shows that the Starbucks continues to enjoy lively demand, and the sales of the previously existing stores is not hampered due to the opening of new stores (Rangaswamy, 2007).

Dunkin’ Brands also announced an increase in sales revenue of 9% last quarter.

Growth is much more than just the mathematics of size versus speed. Starbucks Corp. is far bigger than Dunkin’ Donuts in areas like world-wide brand recognition and its management’s skill to drive growth through product innovation, which is helping the company to deliver exceptional financial results despite of its big size.

Income Statement

Comparison between Starbucks and Dunkin Brand

Particulars	Starbucks	Dunkin brand
Sales revenue (2014)	$16.4 billion	$749 Million
Stores	22519	11460

Sales revenue of Starbuck Corporation in the year 2014 was $16.4 billion whereas the sales revenue of Dunkin Donuts in the year 2014 was $749 million which means that the sales of Starbuck Corporation was more than that of Dunkin Donuts. Starbuck Corporation has 22,519 stores whereas Dunkin Donuts has 11,460 stores.

Starbucks has opened almost 10,000 stores in 64 countries whereas Dunkin’ Brands has a considerable international presence, and many of their international stores are Baskin Robbins stores. In the year 2014, almost 75% of the Dunkin brand consolidated revenue were from the USA while international revenue was less than 5% while 20% of Starbucks’ Corp. Consolidated revenues were from the USA in the year 2014.

On the bases of PE Ratio

One of the biggest drawbacks while analyzing the investment in Starbucks Corp is possibly valuation. Starbucks trades at a very steaming-hot PE ratio, which is around 34 times earnings over the period of last twelve months, a significant premium v/s the whole market (Amiram, Bozanic & Rouen, n.d.). When compared to any of the average company on S&P 500 P/E ratio is near 19.The stock of Dunkin’ Brands is cheaper than Starbucks at the P/E ratio near to 26.

Company	Market Capitalization	Trailing-12-Month-Revenue Growth (YOY)	P/E	P/S
Dunkin’ Brands	$3.9 billion	8.3%	26	5.2
Starbucks	$83.6 billion	16%	34	4.3

Size

As Starbucks is bigger company, this could wrongly lead investors in concluding that Dunkin’ certainly has more room to run and is better to invest. But when we look closely at both the companies it reveals that Starbucks is not only growing faster than the Dunkin’ donuts but has more determined outlook, going ahead.

Growth

Starbucks is a fast growing company among the two and is expecting the increase in revenue by 10% compared to the previous year which will be driven by 1850 new stores opening.

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Dunkin’ Brands expect an increase in revenue growth to be 4% to 6%, which is driven by 400-450 new Dunkin Donuts stores.

Franchising

Dunkin’ brand operates through franchises whereas 99% of Starbucks are company operated. In June 2015, 63% of Dunkin’ Donuts revenue where from royalties and franchise fees. Whereas Starbucks revenue reflects the sale of food, beverages, and all the other items.

Because Starbucks has company-operated stores, therefore, COGS and store expenses (operating) are much higher of  the Starbucks than the Dunkin Donuts. As COGS is higher in the Starbucks’ corporation expenditure structure, therefore, the profits of Starbucks are also more sternly affected by any change in the price of the coffee beans. Starbucks has more capital expenditure as compared to the Dunkin’ Donuts (Haskova, 2015).

Comparison between Starbucks and Dunkin Brand

Quality

Starbucks is more premium brand than the Dunkin’ Donuts. Starbucks commands a higher price, whereas Dunkin Donuts focus on the middle class and provides lower cost menu.

Profitability Ratios

	Starbucks	Dunkin’ Donuts	Starbucks	Dunkin’ Donuts
Gross Margin= Gross Profit/ Net Sales	56%	82%	60%	79%
Return on Assets= Net Income/ Total Assets	7%	1%	24%	5%

Gross Margin: It calculate the cost-effectiveness of the actual products that is sold in the market before some overhead and expenses are excluded. It helps to measure the price of the product above the cost of the product (Flor & Hansen, 2012). Gross margin of Starbuck Corporation in the year 2009 was 56% whereas in the year 2015 it was 60%. Gross margin of Dunkin Donuts in the year 2009 was 82% whereas in the year 2015 it was 79%. This shows that the gross margin of Dunkin Donuts has declined with the period of time. Dunkin’ Donuts gross margin is higher than Starbucks, which shows they are using their inputs more efficiently than Starbucks Corporation and then selling their products.
Return on Assets: It represents the profitability of a company’s in generating revenue.  Since the return on asset of Starbucks is higher than that of Dunkin Donut which means they are more efficient in revenue generation as compared to Dunkin Donuts. Starbucks has assets which are more profitable as compared to that of Dunkin’ Donuts.

Liquidity Ratios 

	Starbucks Corporation	Dunkin Donuts	Starbucks Corporation	Dunkin’ Donuts
Current Ratio= Current Assets/ Current Liabilities	129%	202%	190%	119%
Quick Ratio= (Current Assets-inventory)/Current Liabilities	87%	128%	134%	118%

Current Ratio: The period of less than one year is called Current as per accounting principal. The formula for calculation of current ratio is CA (Current Assets)/CL (current liabilities). It calculate that the company has good amount of assets which can be within a period of one year be converted into cash to repay the debts which will be due next year. In the year, 2009 Dunkin Donuts have the higher current asset, but after that it started to decline, whereas the current ratio of Starbuck have increased. Therefore, Starbuck is in a better position to repay it dues which are due next year.

Quick Ratio: It is similar to current ratio when inventories and current assets are excluded. Excluding inventories are important because all the other items covered in the calculation of current ratio is receivables or cash. Starbucks’s quick ratio in the year 2009 was less than 100%, which means their current assets are less than the required current liabilities when the inventories are excluded. But after 2009 their quick ratio has improved and now in the year 2015 it was better than Dunkin’ Donuts.

Leverage Ratios

	Starbucks	Dunkin Donuts	Starbucks	Dunkin Donuts
Debt Ratio= Total Liabilities/ Total Assets	45%	76%	38%	89%
Times Interest Earned=EBIT/ Annual Interest Expense	15.48	1.6	61.08	3.23

Debt Ratio: It calculate liabilities / assets. It calculate the number of company’s assets provided by debt than that of equity. The Starbucks Corporation had lower debt in 2015 than that of Dunkin’ with is 38% v/s 89%, respectively.

Basics of Analysis

Time Interest Earned: It calculates the company’s capability to pay its interest in a year. It calculate the interest which the organsation is required to pay against the operating income of the company (Suthan, n.d.). In 2015, the EBIT of Starbucks is 61.09 times whereas the EBIT of Dunkin Donuts is 3.23 times, which means Starbuck will be able to pay its interest 61.09 times whereas Dunkin Donuts will be able to pay its interest only 3.23 times.

Turnover Ratios

	Starbucks	Dunkin Donuts	Starbucks	Dunkin Donuts
Asset Turnover= Net Sales/ Total Assets	1.75	0.17	1.62	0.20
Inventory Turnover=( Inventory/ COGS)*365	56.11	32.77	77.95	6.07

Asset Turnover: It processes the capacity of the assets of the company, which can be improved by reducing receivables, reducing inventory, or by increasing the sales by maintaining the assets of the company. In 2015, Starbucks asset turnover was higher, which means they are more efficient than the Dunkin’ brand’ assets.
Inventory Turnover: It calculates the number of times the inventories are used or are sold in a particular year. It shows whether the company is using the inventory efficiently or not. When inventory turnover is higher than it shows that the company is using the inventory efficiently. In the year 2015, Starbucks inventory turnover was higher than that of Dunkin’ Donuts.Starbucks has used their inventory almost 78 times and Dunkin Donuts has used it six times in a year (Vrontis & Kogetsidis, 2008).

As it is seen that Starbucks has the better current ratio, return on assets, times interest earned, debt ratio, inventories and asset turnover. As Dunkin’ Donuts only has gross margin % higher whereas Starbucks has all the other ratios higher therefore Starbuck Corporation is in much better position than that of Dunkin’ Donuts.

Growth Trends Assessment

	Dunkin’ Donuts
	2011	2012	2013	2014	2015
Sales	628	658	714	749	789
Cost	124	144	156	158	160
Profits	504	514	558	591	641

	Starbucks
	2011	2012	2013	2014	2015
Sales	11700	13300	14892	16448	19163
Cost	4949	5813	6382	6859	7788
Profits	6751	7486	8510	9589	11375

From 2011 to 2015, Starbucks’ sales are more than that of Dunkin’ Donuts, the expenses of Starbuck increased by lower amount, and their profits have increased more which means Starbucks Corporation has better compounded annual growth rate than Dunkin’ Brand. Although, Dunkin’ Donuts sales and profits both have increased, but with that their costs have also increased much higher than the increase in sales and profit. The growth trend analysis also shows that Starbucks is better than Dunkin’ Donuts.

Conclusion

Starbucks is a first-class business in which investors can freely have comfortable holding for many years. The stock of Starbucks has always been expensive, but then also it has delivered great returns for investors for the long term, achieving over 300% in last five years (Vrontis & Kogetsidis, 2008).  Whereas Dunkin’ Brands is a rationally good business which is trading at a reasonable premium to the global market.

Starbucks has a solid financial statement with higher coverage of interest expense of operating income and low amounts of the debt. Starbucks introduces new products like Oprah Tea Latte and it experiments with the new different sodas. As Starbucks operates 6,600 restaurants outside the western hemisphere, which means it has plenty of room to run in the emerging markets.

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