Starbucks Financial Analysis



Starbucks Financial Analysis

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant facts and figures relating to the accounting and financial analysis of Starbucks. Starbucks began to introduce new products to its line, including the Frappuccino, a low fat iced coffee using light cream for the more health consciences coffee drinker. Another new product was Starbucks' line of ice cream, to be sold in grocery stores with licensing agreements. By 1996, the Starbucks line of coffee ice cream and ice cream bars were the number one brand of coffee ice cream in the United States. This same year, the North American Coffee Partnership was established, joining Starbucks and Pepsi-Cola Company to sell bottled versions of the Frappuccino (Datamonitor, 2011). In the next section, we will provide brief analysis of Starbuck's financial ratios.

Discussion & Analysis

Starbucks carried much of its recent momentum into the first quarter of 2012. The company turned in its eighth consecutive quarter of high-single-digit comparable-store sales growth; 9% global comp growth for the quarter, including (Mergent, 2011):

9% in the Americas region,

2% in the Europe/Middle East/Africa region, and

20% in the China/Asia Pacific region),

The company also achieved 72% growth in the consumer product group segment as the company moves more to a direct distribution model, and delivered respectable consolidated operating margins of 16.2% (representing an 80-basis-point decline year over year) despite pervasive coffee input costs and channel diversification investments.

These results translated into quarterly earnings per share of $0.50, meeting our internal expectations and surpassing the consensus expectations by a penny (Mergent, 2011).

Still, with the stock trading at 25 times our 2012 earnings per share estimate and an enterprise value/EBITDA multiple of 13 times, expectations were high heading into the period, and we aren't surprised to see the stock trade off modestly following first-quarter results.

We do not plan a material change to our $42 fair value estimate outside of adjustments for the time value of money, but we expect that a wide-moat, medium-uncertainty name like Starbucks should only require a modest margin of safety before building a position (Datamonitor, 2011). Additionally, we believe Starbucks' channel diversification strategy provides the stock with more sources of potential upside than most of our restaurant and retail coverage universe, including new channels for VIA single-serve coffee, wider distribution of Starbucks K-Cups products (including international expansion), international economies of scale, and accelerating packaged coffee market share gains (Mergent , 2011).

Starbucks' 2012 guidance remained largely intact, including 800 net new stores (150 China, 450 in other foreign markets, and 200 U.S.), 10% top-line growth, mid-single-digit comps, 50-100 basis points of margin expansion, and 15%-20% EPS growth. In our view, first-quarter trends suggest that management's top-line outlook is likely to prove conservative (we anticipate mid-teen growth and mid- to high-single-digit comparable sales growth in 2012), but we view the operating margin outlook as realistic when factoring in favorable commodity costs during the back half of the year. Management also tightened its EPS forecast (calling ...