Financial Analysis of Starbucks (2000-2005)

Introduction

Starbucks is one of the coffee companies that is dedicated to the production of quality coffee products and services. Starbucks is specialized in product differentiation and customer service on its verge to influence brand identity in the market. The company has resources and expertise to ensure that its grand strategies are realized. This paper will conduct a financial analysis of Starbucks between 2000 and 2005 to determine its efficacy in realizing its strategies.

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Analysis of Income Statement

Net revenue for the company was $2.6 billion in 2001, $3.3 billion in 2002, $4.1 billion in 2003, $5.3 billion in 2004, and $6.4 billion in 2005. Most of the company's earnings are derived from retail operations. The cost of sales as a percentage of sales for the five years indicates 42% in 2001, 41% in 2002, 41% in 2003, 41% in 2004, and 40.9% in 2005. This shows that Starbucks has organized its cost of sales at a merely constant level even though sales revenue increased with time. The net increase in sales between 2001 and 2002 was 24.2%. 85% of the total sales between these periods was derived from retail services. Revenue from retail services increased by 25.3% between 2001 and 2002. The increase is attributed to the opening up of new retail stores (614 new stores) in 2000, which raised retail transactions in subsequent years.

Consequently, 85% of Starbucks' sales were derived from retail services between 2004 and 2005. Sales revenue from retail services recorded an increase of 21% between 2004 and 2005, the increase being accounted for by the opening up of 746 new stores in 2004. There was a general decrease in the cost of sales between 2001 and 2002 by 1%. The company has ascertained that the decrease in the cost of sales is due to a shifting mix for margin products and sales as well as reduced occupancy costs arising from maintenance activities. The company recorded an increase in net profit as follows: $0.18 billion in 2001, $0.21 billion in 2002, $0.27 billion in 2003, $0.39 billion in 2004 and $0.50 billion in 2005. Starbucks' income statement reveals that the company can raise sales, minimize the cost of sales, and maximize profits in its retail as well as special operations. As seen in the analysis, the company can change its sales strategy as well as differentiate its products based on market trends.

Analysis of the Balance Sheet

Total current assets for the year ended 2002 were $0.77 billion. Out of this, total inventories increased to $0.34 billion from $0.26 billion between 2002 and 2003. As well, the company doubled its total trading stock from $0.10 billion to $0.20 billion between 2002 and 2003. Total current assets for the year ended 2005 was $1.21 billion. The company has controlled the level of its current assets at about 35% of its total assets. This means that it can meet its current financial needs, prevent cash shortages, and maximize investments on assets that earn incomes. The company has recorded a considerable increase in total asset investment. For instance, total assets increased from $2.2 billion in 2002 to $3.5 billion in 2005 (Duke & Sherman, 2009). Out of this, PPE and Equity investment recorded the highest financial plan in the company. PPE increased to $1.8 billion in 2005 compared to $1.3 billion in 2002. There was also a significant increase in equity investments; $0.10 billion in 2002 to $0.20 billion in 2005.

A major sect of equity investments was used to purchase short-term and long-term financing for the company. This means that the company is majorly financed by debt and not common stock. Moreover, the company has a pool of outstanding stock which it can sell or repurchase to meet its short-term and long-term investment needs. The company records an increasing amount of retained earnings for the five years, for example, $0.8 billion in 2002 and $1.9 billion in 2005. Since the company has more debt than equity financing, then it means only a little amount of its net income is paid to shareholders. This then means a large sect of its retained earnings can be used to finance the company's extension needs.

Analysis of Cash Flow Statement

Net cash inflow recorded an abnormal increase in 2001, an increase of 253.81%. The company recorded an increase in its net cash inflows for the next three years; $1.0 billion in 2002, $2.0 billion in 2003. There was a reduction in net cash inflow between 2004 and 2005; $0.14 billion for 2004 and $0.17 billion for 2005. The company recorded a constant increase on equity and other investments; $0.17 billion in 2001, $0.47 billion in 2003, and $0.64 billion in 2004. The company has generally increased proceeds from the issuance of common stock for the five years; $0.59 billion in 2001, $1.07 billion in 2003, $1.37 billion in 2004 and $1.63 billion in 2005 (Vaz, 2011). The fact that the company has a pool of outstanding stock, we expect that it will make more gains from the issuance of stock in the subsequent years.

Conclusion

The company has recorded a significant increase in net revenue as well as a reduction in the cost of sales for the five years. Additionally, the company shows that it has a pool of assets, both current and long-term, to back on its retail operations. Moreover, the company has more debt financing as well as an increase in net cash inflows for five years. An increase in gains from the issuance of stock from outstanding shares means that the firm is capitalizing on expansion investments. The above analysis shows that Starbucks is in line with achieving its strategies.

References

Duke, J. M., & Sherman, H. (2009). Case Study: Starbuck's Strategy and Internal Initiatives to Return to Profitable Growth Jason M. Duke Excelsior College.

Vaz, J. I. S. D. S. (2011). Starbucks-the growth trap (Doctoral dissertation).