Starbucks Financial Assessment Essay

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1. Introduction



Firms may be successful by satisfying customer needs, but their ultimate accountability for financial performance is to the owners of the firm. Actions undertaken by quoted firm will usually have the direct, or indirect, aim of generating revenues and profits for the firm, and therefore the owners (Tarraf, 2012). When investors assess a potential investment they will look at the financial performance of a firm, assessing the past performance, with consideration of the way current and expected strategies will impact on the organizations performance, in the context of the expected macro-environmental conditions (Bodie, Kane, & Marcus, 2014). The investors will assess the share price of the firm, being more likely to make a purchase if they believe the value of the share is likely to increase with a significant amount of the assessment based on assessments of past performance (Hens & Rieger, 2016; Nellis & Parker, 2006). This report examined and demonstrates this process looking at the performance of Starbucks, assessing the performance using quantitative and qualitative data, which will also be used to assess the share value, based on the Constant Dividend Growth Rate model, with the analysis leading to a recommendation regarding investments in Starbucks stock.

2. Qualitative Analysis



Financial analysis is an important element of investment assessment, but the quantitative assessment should be accompanied by a qualitative analysis to provide context for the results (Myers & Majluf, 1984). This section examines the background and position of Starbucks within the industry, and the way the firm is viewed by investors by examining recent stock price movements.

2.1 Background to Starbucks



Starbucks is a globally recognised coffee house chain, which also roasts, markets, and retails coffee. Founded in 1971 in Seattle with a single store specialising in the roasting of coffee (Schultz & Yang, 1998). However, it was under the leadership of Howard Schultz who acquired the company from the founders in 1987 that the company started to grow (Schultz & Yang, 1998). By 1989 the company was roasting 2 million pounds of coffee per year, and had 46 stores, and by the time the initial public offering was made in 1992 the company had 140 stores, with revenues exceeding $73 million (Schultz & Yang, 1998).



The company started its international expansion in 1996, with the first overseas stores opening in Tokyo in Japan, followed by the Philippines in 1997, and the UK, as well as Thailand, Taiwan, and New Zealand in 1998 (Starbucks, 2017a). The company has also undertaken related diversification, expanding the product range into grocery stores, and later undertaking sales of coffee brewing equipment as well as the coffee, online (Starbucks, 2017a).



By December 2016 had a total of 24,893 stores located across the globe (Loxcel Geomatics, 2017), with the expansion aided significantly through the use of the franchise model (Schultz & Yang, 1998). The expansion model has been particularly useful, as it has facilitated a cost-effective method of moving into many different countries while limiting capital requirements (Nijmeijer, Fabbricotti, & Huijsman, 2014). The franchising model allowed the brand to expand with third parties making investments in branded cafes, paying a fee for using the name, as well as purchasing the inputs from the franchisor (Min & Min, 2011). This provided revenue for Starbucks, at the same time as limiting the risk and benefiting from local knowledge provided by the local investors (Mintzberg, Quinn, & Goshal, 2003).



The organisation has faced some challenges, decreasing demand following the recession, and difficulties associated with cannibalisation reduced sales in some areas, and resulted in a restructuring of the firm including some closures (Schultz & Gordon, 2011). However, when examining the organisation over the last five years, the performance appears to be solid with the latest set of accounts which ended in September 2016 showing a revenue of $21,316 million with a gross profit margin of 10.07% and a net profit margin of 13.22%. The firm has a positive outlook, seeks to enhance its reputation with string CSR strategies, and has the mission statement "To inspire and nurture the human spirit -- one person, one cup and one neighborhood at a time" (Starbucks, 2017b). The current growth plans of the organization include continued expansion, but rather than simply maintaining the existing strategy, the organization is diversifying the way it sells coffees including setting up more drive-through outlets, as well as new smaller walk-through units in areas such as Boston, Seattle, and New York (Trefis Team, 2016)



These all appear to be positive signs, however, while internal factors other important, it is also necessary to consider the company in terms of its industry position, as this will also have a potential impact on its future performance (Bodie et al., 2014)

2.2 Industry Position



Starbucks is a global leader.

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The firms' core market is the US, where 54.5% of its stores are located (Loxcel Geomatics, 2017) and 73.7% of its net revenues originate (Starbucks, 2017b). The firm has a dominant passion in the US, where it has 42.4% of the total gourmet coffee chain market (Statista, 2015). It is ahead f the leading competitor Dunkin Doughnuts, under the Dunkin' Brands Inc. banner which has a 25.5% market share, with the remaining 32.1% market being fragmented, made up of many smaller players (Statista, 2015). The firm has faced a number of challenges in the United States, where the rapid expansion had resulted in significant levels of cannibalisation and prohibitive overhead costs impacting negatively on profits (Schultz & Gordon, 2011). The negative publicity associated with the closing of the stores, harm the reputation in short-term, as it helps the organisation to become more profitable (Schultz & Gordon, 2011). In reality, the organisation may not to be increasing its market share due to the growth in the market, but it is increasing the number of customers served, 2013 an estimated 1,959 million customers were served in the United States, this rose by 5.84% in 2014 to 2,073 million, by 5.51% in 2015 to 2,188 million and an estimated 2,366 million in 2016 which was 8.15% growth in customer numbers (Trefis Team, 2016).



The company maintained its position as the leader in the gourmet cafe coffee market through a high level of control over the supply chain to maintain quality, as well as differentiation of the products sold. During the Christmas period the company changes the cups to the red cups, and offers seasonal specialities which are often very popular, such as the eggnog latte, while at Halloween there is the Halloween spiced lactate, a brief review of the company's social media will demonstrate the popularity of these products. The organisation is also investing in research and development to improve existing products and bring new ideas to market, which was seen recently with the freeze-dried Starbucks Via brand (Schultz & Gordon, 2011).



Internationally, the company is also a leading brand, very well known, supported through excellent marketing, including product placements in blockbuster films, as well as extensive use of social media marketing (Phan, Thomas, & Heine, 2011). With the company demonstrating increasing growth internationally, especially the Asian markets, the organisation also appears to be well placed internationally (Starbucks, 2017a).



To assess the way in which investors appear to be perceiving the current and potential future performance of Starbucks, rather than just considering the number of stores in market share, the stock price movements can also be considered.

2.3 Recent Stock Price Movements



Examining the stock price movements of Starbucks indicates that the last five years have been relativity good for Starbucks, as shown in figure 1 below.



Figure 1; Starbucks Stock Price January 2012 -- January 2017



(Morningstar.com, 2017)



At the beginning of the five-year period, the stock price was $24.08 and the growth has been impressive, as value for the stock on the 13th of January 2017 was $57.85. However, this is a long-term performance and it is the short-term that is more likely to reflect the current status of the firm. Looking at the last year the performance is far more volatile, as shown in figure 2



Figure 2; Starbucks Stock Price Performance January 2016 -- January 2017



(Morningstar.com, 2017)



Over the last year, the share price has risen and fallen, starting at $58 before falling to $54.14 in February, ending the year at $57.85, indicating only modest growth while the graph indicates there could have been some significant losses depending upon purchase and sale dates if the investment took place within this year's (Morningstar.com, 2017).



Over the last 52-week range of the stock price has been between $50.84 and $61.74 (Morningstar.com, 2017), with the firm suffering from bad news indicating loss of market share and constrained growth (Trefis Team, 2016). However, potential investors, as well as existing investors may have concerns when the performance….....

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References

Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments. London: McGraw Hill Higher Education.

Elliott, B., & Elliott, J. (2015). Financial Accounting and Reporting. London: Pearson.

Hens, T., & Rieger, M. O. (2016). Information Asymmetries on Financial Markets. In Financial Economics A Concise Introduction to Classical and Behavioral Finance (pp. 277 -- 285). London: Springer Publishing Co.

Howells, P. G. A., & Bain, K. (2007). Financial Institutions and Markets. London: Longman.

Loxcel Geomatics. (2017). How many Starbucks stores are out there? Retrieved from https://www.loxcel.com/sbux-faq.html

Min, H., & Min, H. (2011). Benchmarking the service quality of fast-food restaurant franchises in the USA: A longitudinal study. Benchmarking: An International Journal, 18(2), 282 -- 300.

Mintzberg, H., Quinn, J., & Goshal, S. (2003). The Strategy Process. Harlow: Prentice Hall.

Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261 -- 297.

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187 -- 221.

Nellis, J. G., & Parker, D. (2006). Principles of the Business Economics. Harlow: Prentice Hall.

Nijmeijer, K. J., Fabbricotti, I. N., & Huijsman, R. (2014). Making Franchising Work: A Framework Based on a Systematic Review. International Journal of Management Reviews, 16(1), 62 -- 83.

Phan, M., Thomas, R., & Heine, K. (2011). Social Media and Luxury Brand Management: The Case of Burberry. Journal of Global Fashion Marketing: Bridging Fashion and Marketing, 2(4), 213 -- 222.

Schiller, R. J. (2015). Irrational Exuberance. Princeton, NJ: Princeton University Press.

Schultz, H., & Gordon, J. (2011). Onward How Starbucks Fought for Its Life without Losing Its Soul. Chichester: John Wiley & Sons.

Schultz, H., & Yang, D. J. (1998). Pour Your Heart into it: How Starbucks Built a Company One Cup at a Time. New York: Hyperion.

Starbucks. (2017a). Starbucks Company Timeline. Retrieved from https://www.starbucks.com/about-us/company-information/starbucks-company-timeline

Starbucks. (2017b). Starbucks Investor Relations. Retrieved from http://investor.starbucks.com/investor-relations/default.aspx

Statista. (2015). Market share of the leading coffee chains in the United States in 2014. Retrieved from https://www.statista.com/statistics/250166/market-share-of-major-us-coffee-shops/

Tarraf, H. (2012). Exploring the Relationship Between Corporate Governance and Financial Performance During The 2007-2008 Financial Crisis: Evidence from U. S. Bank Holding Companies. International Research Journal of Applied Finance, III (11), 1564 -- 1587.

Trefis Team. (2016). Let's Look At Starbucks' Growth Strategy. Forbes. Retrieved from http://www.forbes.com/sites/greatspeculations/2016/09/19/lets-look-at-starbucks-growth-strategy/#402b20157175

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