Lawrence Sports

Financial Ratio Analysis of the Starbucks Coffee Company

Question: What is all the buzz about?

Answer: The goal to have a cup of Starbucks in the hands of every coffee or tea drinker on the planet.

Starbucks is the internationally recognized maker of specialty coffees with a presence of more than 8,000 coffee shops in 30 countries, and the company is setting its sights higher as the latest expansion efforts at home and abroad have resulted in phenomenal sales with consolidated net revenues of $5.3 billion in fiscal 2004 (Starbucks, 2004).

What started as a small whole bean roasting company in 1971 in the historic Seattle Pike Place Market was transformed by the marketing manager Howard Schultz in 1985 with its first Italian-style Starbucks coffee latte.

Today, the "Starbucks Experience" is spreading around the globe as more people discover and embrace the many tastes of the specialty coffees and teas offered by the coffeehouse mogul and chairman Howard Shultz, his management team, and their investors. The Seattle-based coffee giant recently raised its ultimate goal to 30,000 stores world-wide.

Does the goal sound too optimistic? Well, this paper will look at the financial ratios of the company for the last three fiscal years to see how the company has performed in four major financial areas: Liquidity, Activity, Profitability, and Financial Leverage. These four areas contain several ratios that tell the recent story of the ability of the company to meet its financial obligations, get a return on investment, its liquidity, and how much debt the company is carrying.

Descriptions and Interpretations of the Financial Ratios of the Starbucks Corporation for Fiscal Years 2002 through 2004

The fiscal year of the Starbucks Corporation ends on the Sunday closest to September 30. The fiscal year ended on October 3, 2004 included 53 weeks, with the 53rd week falling in the fiscal fourth quarter. Fiscal years 2003 and 2002 each had 52 weeks. Fiscal year 2005 will have 52 weeks (Starbucks, 2004).

The following spreadsheet contains the ratios, their descriptions, and interpretations of the Starbucks Corporation for fiscal years 2002, 2003, and 2004.

Financial Ratio Analysis: Starbucks Corporation

Description 2002 2003 2004 Industry Standard Variance to Standard Interpretations

Liquidity Measures

Acid-Test Ratio 1.04 0.86 1.12 0.6 0.52 The Quick Ratio for Starbucks has remained stable and consistently better than the industry standard. In 2003 the Quick Ratio dipped to .086 at its lowest, and still far superior to the industry standard of 0.6

Current Ratio 1.58 1.52 1.75 1.3 0.45 Starbucks current ratios has been consistent over the last 3 years at ratios' greater than 1.5 and are better than industry standards, demonstrating Starbucks ability to meet financial obligations.

Financial Ratio Analysis: Starbucks Corporation

Description 2002 2003 2004 Industry Standard Variance to Standard Interpretations

Working Capital 0.14 0.12 0.18 0 0.18 Working capital is an indicator of an entities financial success or potential financial instability. Starbucks total assets are $3,318,957,000 and the company is able to meet financial obligations and confidently invest in new innovation and continue to grow both nationally and internationally.

Activity Measures

A/R Turnover 37.32 40.43 45.4 42.40 3 Starbucks assets and receivable turnover has continued to rise since 2002. Even though the ratio was above the industry standard in 2004 the A/R turnover is still acceptable and controllable over the long-term.

Inventory Turnover 11.28 6.04 10.8 10.90 -0.1 Inventory turnover within Starbucks has been below industry standards expect in 2002. A stabilizing workforce over 2003 and 2004 have led to a sharp reduction in Inventory turnover for Starbucks.

Plant and Equipment Turnover 2.28 2.28 2.28 0 2.28 This is the Fixed Asset Turnover (FAT) ratio and shows the efficiency of Starbucks to use its fixed assets to generate gross revenues. For the last three years, Starbucks has steadily generated more than twice the number of dollars in gross revenues than the company has invested in its fixed assets.

Financial Ratio Analysis: Starbucks Corporation

Description 2002 2003 2004 Industry Standard Variance to Standard Interpretations

Activity Measures - continued

Total Asset Turnover 1.48 1.49 1.90 1.80 0.10 When comparing the gross sales revenue of Starbucks to the amount of money the company has invested in all its assets - Current, Fixed, and other long-term assets - Starbucks has improved each of the last three years and is the leader in this industry for generating sales from all its assets.

Profitability Measures

Return on Investment 35.16 45.29 65.04 0 65.04 Starbucks return on investment (ROI) has increased significantly over the last three years. It is much higher than an American company standard of 8% to 12%. ROI shows the rate of return Starbuck's was able to earn on the assets that it had available.

Return on Equity 12.46 12.89 15.75 20.2 -4.45 Return on equity (ROE) for Starbucks has steadily increased for the last three years and is currently higher than the average American company (ROE) of 12%-15%. Starbucks is slightly lower than competitors by 4.45%. This is acceptable because of company expansion. ROE shows profits of Starbucks as a rate of return on owner's equity.

Financial Ratio Analysis: Starbucks Corporation

Description 2002 2003 2004 Industry Standard Variance to Standard Interpretations

Profitability Measures - continued

Return on Assets 9.38 9.83 11.77 14 -2.23 ROA tells shows what earnings were generated from invested capital (assets). ROA for public companies can carry substantially, depending on the industry they are in. Starbucks return on assets for the last 3 years has been modestly below the industry standard.

Operating Margin 9.69 10.42 11.52 11.9 -0.38 Starbucks