239921_gdrt33172fsa

8/13/2019 239921_GDRT33172FSA

1/4

Starbucks Corporation

Starbucks Corporation- Financial and Strategic Analysis Review

Reference Code: GDRT33172FSA

Page 1

Starbucks Corporation - Financial and Strategic Analysis ReviewPublication Date: 27-Mar-2013 Reference Code: GDRT33172FSA

Company Snapshot

Key Information

Starbucks Corporation, Key Information

Web Address www.starbucks.com

Financial year-end September

Number of Employees 160,000

NASD SBUX

Source : GlobalDataKey Ratios

Starbucks Corporation, Key Ratios

P/E 31.67

EV/EBITDA 15.78

Return on Equity (%) 27.09

Debt/Equity 10.76

Operating profit margin (%) 15.02.00

Dividend Yield 0.01

Note: Above ratios are based on share price as of 25-Mar-2013

Source : GlobalData

Share Data

Starbucks Corporation, Share Data

Price (USD) as on 25-Mar-2013 56.69

EPS (USD) 1.79

Book value per share (USD) 6.82

Shares Outstanding (in million) 773

Source : GlobalData

Performance Chart

Starbucks Corporation, Performance Chart (2008 - 2012)

Source : GlobalData

Company Overview

Starbucks Corporation (Starbucks) is a world-renowned

specialty coffee maker. It roasts, markets and retailsspecialty coffee. It offers several blends of coffee,handcrafted beverages, merchandise, and food items.Starbucks also offers a range of consumer products incoffee and tea, readymade drinks, and Starbucks icecream. The company markets its products under itsflagship Starbucks brand and other brands such as TazoTea, Seattles Best Coffee, Starbucks VIA, TorrefazioneItalia Coffee, and Evolution Fresh. Starbucks, through itscompany-owned and licensed stores, operates across theAsia-Pacific, the Middle East, Africa, Europe and theAmericas.

SWOT Analysis

Starbucks Corporation, SWOT Analysis

Strengths Weaknesses

Expanding Operating Margin

Global Retail Footprint

Overdependence on the USMarket

Opportunities Threats

Inorganic GrowthOpportunities

Business Expansion

Emerging Market Entry: India

Intense Competition

Legal Proceedings

Higher Commodity CostsSource : GlobalData

Financial Performance

The company reported revenues of (U.S. Dollars) USD13,299.50 million during the fiscal year endedSeptember 2012, an increase of 13.67% over 2011. Theoperating profit of the company was USD 1,997.40million during the fiscal year 2012, an increase of

15.56% over 2011. The net profit of the company wasUSD 1,383.80 million during the fiscal year 2012, anincrease of 11.09% over 2011.

8/13/2019 239921_GDRT33172FSA

2/4




Page 2

Starbucks Corporation - SWOT AnalysisSWOT Analysis - Overview

Starbucks Corporation (Starbucks) is a roaster, marketer and retailer of specialty coffee. Global retail footprint andexpanding operating margin are its key strengths, even as, overdependence on the US market remains a major area ofconcern. Entry into emerging markets like India, business expansion through setting up new stores across variousgeographies and acquisition of related companies could present ample growth opportunities to Starbucks. However, higher

commodity costs, intense competition, and legal proceedings could have an adverse impact over the business, operatingresults and financial condition of the company.Starbucks Corporation - Strengths

Strength - Expanding Operating Margin

Starbucks reported operating income of $2 billion in 2012 as compared to $1.7 billion in 2011. This resulted in improvementin the companys operating margin from 14.8% in 2011 to 15% in 2012. This expansion in operating margin was driven byincreased sales leverage and the absence of charges in fiscal 2012 related to the Seattle's Best Coffee store closures inBorder's bookstores. Sales leverage improved as total net revenues increased 14% to $13.3 billion driven by globalcomparable store sales growth of 7% and a 50% increase in Channel Development revenue. Increase in sales helpedStarbucks mitigate the impact of higher commodity costs, mostly coffee. Improved operating margin indicates efficient costmanagement or a strong pricing strategy by the company. Overall, such rise in operating margin under tight consumerspending reflects Starbucks's focus on improving its profitability.

Strength - Global Retail Footpr intThe company roasts, markets and retails specialty coffee across 60 countries worldwide. As of September 30, 2012,Starbucks operated a total of 18,006 stores across 60 countries comprising of 9,405 company-operated stores and 8,661licensed stores. It expanded its global footprint by opening 398 company-operated stores and 844 licensed stores during2012. As of September 30, 2012, Starbucks operated 7,857 company-operated stores in the Americas, 882 in EMEA, and666 in CAP. It also opened 351, 139, and 354 licenses stores in the Americas, EMEA, and CAP, respectively. For 2013,Starbucks plans to open new stores and remodel existing stores in the US, indicating its interest to grow its business andmarket shares over the next few years.Starbucks Corporation - Weaknesses

Weakness - Overdependence on the US Market

Starbucks sells its products through retail channels in the Americas, the Asia Pacific, Europe, Middle East and African

regions. Even though it has operations worldwide, the contribution of revenues from its international operations is very less.During 2012, Starbucks generated about 76.5% of its total sales from the US and 23.5% from other countries. Thisindicates high dependence of Starbucks on the US market in generating its revenue. Any decline in revenue from the USmarket could result in reduced cash flows for funding its international business expansion plans and for returning cash toshareholders.Starbucks Corporation - Opportunities

Opportunity - Inorganic Growth Opportunities

In line with its business strategy, Starbucks pursues inorganic growth opportunities through acquiring related businessesacross is area of operations. In November 2012, Starbucks agreed to acquire Teavana Holdings, Inc. (Teavana), aspecialty retailer offering more than 100 varieties of premium loose-leaf teas, authentic artisanal teawares and othertea-related merchandise, for $620m in cash. This potential acquisition would complement its Tazo business givingStarbucks a two-tiered market position for tea. With the combination of the Teavana and Tazo brands Starbucks plans todefine a new elevated platform of tea experience and education and expanding tea product portfolio. In July 2012,

Starbucks acquired 100% interest in Bay Bread, LLC and its La Boulange bakery brand (collectively La Boulange), toelevate its core food offerings and build a premium, artisanal bakery brand. In November 2011, the company acquiredEvolution Fresh, Inc. for $30m in cash. This has marked Starbucks entry into the $1.6 billion super-premium juice segmentas well as represents its intentions to fully enter the $50 billion Health and Wellness sector. In March 2012, the companyopened first Evolution Fresh store in Bellevue, Washington, positioning it as a leader in the cold-crafted juice category.Such business acquisitions are expected to offer Starbucks opportunities to innovate new products, enter new categories,and expand its product portfolio and distribution channels.Opportunit y - Business Expansion

Starbucks has been constantly investing in expanding its global presence by opening retail stores across the world. During2012, the company opened its 700th store in China as it continues to execute against its significant growth plans in theCAP region; Evolution Fresh opened new retail locations in downtown Seattle and San Francisco; and announced a

8/13/2019 239921_GDRT33172FSA

3/4




Page 3

partnership with Umoe Restaurant Group to open stores in Scandinavia in 2013. In February 2012, the company and itslicensed partner SSP opened Norways first Starbucks coffeehouse at Oslo Airport. This relationship with SSP aligns withStarbucks to open stores where customers expect them to be and meets the growing demand for high quality coffee andservice in the travel channel. Such continued effort in setting up new Starbucks stores would enhance its global footprintand its possibilities to generate higher earnings.Opportunit y - Emerging Market Entry: IndiaStarbucks initiated its entry into India. In January 2012, Starbucks and Tata Global Beverages Limited have entered into anagreement to establish a 50/50 joint venture company, TATA Starbucks Limited, which will own and operate Starbuckscafes which will be branded as Starbucks Coffee A Tata Alliance. Initially, the retail stores will be developed in Delhi andMumbai in calendar 2012. In October 2012, Tata Starbucks Limited opened the doors to the first Starbucks store in India. Inanother souring and roasting agreement between Starbucks and Tata Coffee Limited (TCL), TCL will roast coffee to supplyTATA Starbucks Limited, and to export to Starbucks. This joint venture is expected to expand the range of offerings suchas high quality Arabica coffee, handcrafted beverages, locally relevant food, and legendary service for Indian consumers.Overall, this joint venture is expected to present opportunities to innovate in the retail space and bring new beverageexperience to Indian consumers. Sharing common values of responsible business ethics and a commitment to community,Starbucks and Tata, are expected to gain trust and respect of their customers and partners, growing further in theirbusinesses.Starbucks Corporation - Threats

Threat - Intense CompetitionThe company's competitors for coffee beverage sales include quick-service restaurants and specialty coffee shops. Itscurrent market is highly competitive and with the entrance of more new players, the level of competition is expected tofurther intensify in the near future, which may result in price reductions. Starbucks competes with various manufacturersand distributors of coffee products, having substantially greater financial, marketing and distribution resources. Thecompanys other competitors include specialty coffees sold through supermarkets, specialty retailers and a growing numberof specialty coffee stores under the whole bean coffee segment. Besides, Starbucks whole bean coffees and its coffeebeverages compete indirectly against all other coffees in the market. Starbucks Specialty operations face significantcompetition from established wholesale and mail order suppliers. The company's major competitors include Caribou CoffeeCompany, Inc., McDonald's Corporation, PepsiCo, Inc., The Procter & Gamble Company, Kraft Foods Inc., and NestleUSA, Inc. If the company is not able to maintain the product quality and consumer loyalty, this intense competition couldreduce the sales volume of the company, thereby hampering its market position.Threat - Legal Proceedings

Starbucks notified Kraft Foods Global, Inc. (Kraft) that it will discontinue its distribution arrangement with Kraft on March 1,2011 due to material breaches by Kraft of its obligations under the Supply and License Agreement dated March 29, 2004.In December 2011, Kraft announced to sought for a preliminary injunction in the U.S. District Court for the Southern Districtof New York against Starbucks Coffee Company for violating terms of the roast and ground coffee agreement. This is tostop Starbucks from proceeding as if the agreement has been terminated, when, in fact, the contract is still in force. In April2012, Starbucks and Kraft exchanged expert reports regarding alleged damages on their affirmative claims. Starbucksclaimed damages of up to $62.9m from the loss of sales resulting from Kraft's failure to use commercially reasonableefforts to market Starbucks coffee, plus attorney fees. Kraft's expert opined that the fair market value of the agreement was$1.9 billion. After applying a 35% premium and 9% interest, Kraft claimed damages of up to $2.9 billion, plus attorney fees.Starbucks presented evidence of material breaches on Kraft's part and sought nominal damages from Kraft for thosebreaches. Kraft presented evidence denying it had breached the parties' agreement and sought damages of $2.9 billionplus attorney fees. The decision from the arbitrator is expected in the first half of fiscal 2013. Any uncertain outcome ofsuch litigation could affect the companys operating performance in upcoming years.Threat - Higher Commodity Costs

The main ingredient in Starbucks products is coffee. Coffee price has been increasing at a higher pace over the years.According to the International Coffee Organization, Coffee price increased from 147.24 cents/pound in 2010 to 210.39cents/pound in 2011. Higher commodity costs, mainly coffee, negatively impacted Starbucks operating income byapproximately $214m, equivalent to approximately 160 basis points of impact on operating margin. Moreover, monthlyaverage coffee price reached 188.90 cents/pound in January 2012, 159.07 cents/pound in July 2012, and 147.12cents/pound, indicating huge fluctuation. Higher and fluctuating commodity costs could have an adverse effect overStarbucks business, operating results and financial condition.NOTE:

8/13/2019 239921_GDRT33172FSA

4/4




Page 4

* Sector average represents top companies within the specified sectorThe above strategic analysis is based on in-house research and reflects the publishers opinion only

239921_gdrt33172fsa

Documents