What Went Wrong with Starbucks?

Financial Analysis and Business Evaluation Case Study
By Julia S. Kwok* Elizabeth C. Rabe Northeastern State University

* Corresponding author: Department of Accounting and Finance, College of Business and Technology, Northeastern State University, Broken Arrow, OK 74014; Email: kwok@nsuok.edu; Phone: 918-449-6516.

economic value added JEL classifications: L25. Keywords: financial statement analysis. free cash flows. L22 . Du Pont analysis. the competition and Starbuck‘s business strategies on their financial performance. G31. expansion. Starbucks Coffee Company experienced continuous drop of stock price since the beginning of 2007. This case encourages a more in depth examination of how the financing of the expansion impacted financial ratios. F23. This case illustrates the importance of analysis of free cash flows and return on capital when making capital budgeting decisions. common size statement. Further assessment should evaluate the impact of expansion on the company‘s free cash flows and return of the capital investment. there was 20% increase in revenues and 9% increase in net income last year. Upon first glance of their financial statements. M41. The case provided detailed information that would allow students to investigate the impact of the economic and business conditions.What Went Wrong with Starbucks? Financial Statement Analysis Abstract After decades of grande growth based on the Starbucks experience. Such growth could be counter intuitive to the drop of market value. The students were advised to consider what changes to Starbuck‘s strategies could increase the economic value added of the expansion and help to reverse their road to failure. Students would need to evaluate the relative contribution of factors leading to the drop of the stock price. ratio analysis.

I used to sit and listen to the music while I sipped my coffee at Starbuck. but I really like their hazelnut Mocha on a cold November morning. 1/17 . I am latte deficient. return on invested capital and financial ratios.Starbucks Coffee Company Why went wrong with Starbucks? Financial Statement Analysis Case Study ______________________________________________________________________________ It was a chaotic morning in Java Investment. May I have a muffin. In the last three years. the atmosphere of the new ones is not as enjoyable as the old ones.‖ Sandy replied. but since they closed the one closest to here. It is starting to feel like Dunkin Donuts. Ronnie.‖ ―I know. I started looking at their free cash flows. Starbucks has really grown since that first Seattle store in 1971. our boss. a new analyst. ―I haven‘t had a blueberry muffin from them in ages. came into the office carrying a bag from Starbucks and a tall coffee. I used to stop there a couple of times a week for latte. they have opened 6. Ooo. ―Where have you been? The Nekki has just fell five percentages last night. Tom.‖ ―Sandy. I either have to make a drive or stop at Caribou to get my full-bodied grande Espresso. But it‘s just not the same. ―That is true.‖ Ronnie replied. you seem to know a lot about Starbucks. from 2005 to 2007. you‘ve brought Starbucks!‖ Sandy exclaimed. ―I had to drive three miles out of my way for this.‖ Sandy said. ―Well.442 stores. As they open a lot more stores. has asked me to evaluate the impact of their expansion. Do you know why they closed the nearby store‖ said Ronnie.

―I saw that the last time I went to Starbucks. In 2005 Starbucks management announced its intention to double the number of retail stores and increase the number of customers to all stores. The Starbucks Company. But I think they make more money selling coffee.‖ Ronnie offered.‖ asked Sandy. The company began in 1971 in the Pikes Place area of Seattle. the management was forecasting the opening of an additional 2500 stores in 2008.‖ Ronnie commented. take one. I can buy the music I like listening to from Starbucks. At the close of the 2007 fiscal year.000 located in both the US and internationally by 2005.Starbucks Coffee Company ―Sure. WA. in fact. Earnings per share grew from 61 cents per share 87 cents per share over the period of 2005-2007. 65% of the revenue comes from coffee. You can even buy your own Espresso brewing machine from them. Starbucks offers a variety of products. sold coffees. teas. Do you want to work with me on my new assignment since you are a Starbuck fan. accessories and equipment through retail outlets. teas. They also sell coffee beans and those double shot packaged drinks. It also sold coffee beans. ―Let‘s start reviewing their business environment and financial statement. Starbucks had added 1672 stores during 2005. 2/17 . and other drinks. It continued to open new stores with 2199 openings in 2006 and 2571 openings in 2007. ―Yes. It had expanded its number of retail stores to over 15. Company History Sandra had already collected some basic company information about Starbucks. Inc. Have you seen the latest financial report that should have come out two months ago? Let‘s start with 2006 to the most recent 2007 report.‖ Sandy continued. foods items. ―Besides expanding locations. and cold drinks wholesale.

The Starbucks Experience The transformation of a small coffee shop to an ―authentic Italian coffee bar‖ was led by Mr. Inexperienced new staff was under-trained offering sub-standard services. The experience drove significant growth of Starbucks over the years. He felt Starbucks should be a ―great experience. representing convenience instead of unique experience.Historical Prices for Starbucks Co –Yahoo! Finance 2009). Ronnie and Sandy both agreed that shareholders did not seem to agree with Starbucks‘ rapid expansion.Starbucks Coffee Company Stock prices during this time span rose from the $30 per share in November 2005 to $35 per share a year later. The stock prices then began a steady downward slide to $23 per share as of November of 2007 (BUCX. the barista‘s fine touch of the creation of a perfect cup of coffee was replaced by an automatic espresso machine and the vacuum-packed ground coffee in the new cookie-cutter stores that mushroomed during 2005-2007. and enjoy themselves. It should involve the aroma of robust coffee. that standardization and rapid growth started to diminish the branding of the Starbucks experience. theater and romance. making it a personal experience. and not just a retail store (Maney 2009). To standardize the experience. Started in Seattle. Starbucks provided a ―Third Place‖ for customers to meet. Howard Schultz (Maney 2009). sprawling around the northwest region of the county. A Starbucks barista would grind the coffee beans and hand-prepared coffee specific to the customer‘s order. relax. New stores could be found at small strip malls and in grocery stores. Ironically. 3/17 .

the privately held Dunkin‘ Brands Inc. Malkin 2007.000 locations in the US 4/17 . With 13. McDonald had almost twice the number of units than that of Starbucks (Aboutmcdonalds. and NationMaster. Therefore. McDonalds started the more intense competition when it upgraded its coffee in 2006.600 locations in 118 countries. in aggregate they are large in numbers and they are providing the experience that Starbucks has lost. In 2007. high cholesterol donuts every day.com 2009. health conscious Yuppies were less likely to have low cost.000 locations. However. increasing geographical coverage domestically and internationally had been their corporate focus. The existing customer base and demographic coverage gave McDonalds an upper hand on access to breakfast coffee drinkers who are sensitive to the price differentials and appreciate convenience of McDonald‘s locations. Starbucks had 14. locally owned independent or small chained cafés provided comparable products and an atmosphere of community. While they lack the size.000 locations in 43 countries and McDonalds had 25.Starbucks Coffee Company Fierce Competition Direct competition from smaller companies such as Caribou Coffee. The largest company that directly competed with Starbucks was Caribou Coffee. Dunkin was likely to compete more directly with McDonald than Starbucks for the average customer. Net sale from the Caribou Coffee was 3% of that of Starbucks. Starbucks maintained that the quality of their products and services differentiated themselves from the competition. They were planning to install coffee bars in all US locations in 2008.com 2009). geographical coverage and market share of Starbucks. In 2007. they introduced a new line of Espresso drinks to position itself between Starbucks and Krispy Kreme (Shepherd 2007). They planned to open 20. which was the second largest specialty coffee house. offered quick and convenient to-go-coffee.

In Washington State. according to the company‘s chief financial officer (Helm and Goudreau. the declining customer‘s spending power would change the traditional inelasticity of customer demand (Helm and Goudreau.000 internationally in four years. providing convenience. 2007). caused Starbucks to cannibalizing their own stores through over-saturation of an area. More than two thirds of US consumers were reducing their spending.com 2009). the average income of first-time customers had dropped to $80. Starbucks‘ susceptibility to economic downturn was already reflected in their flat-to-negative transaction count trend (Starbucks 2007 Annual Report 2007). ―Less than 1% of the (4% ) same-store (sales) increase (last year) came from an increase in the value per customer transaction. Traditionally. However. In the past. Starbucks‘ first-time customers had an average income of $92. Oil prices had been dramatically increased from 2003 to 2007.000 per year.000 people (Palmer 2007). and were willing to pay for the experience and not just the coffee. However. raising prices per cup of coffee had little effect on demand. 2007).000 a year. The inflation-adjusted price of a barrel of crude oil on NYMEX price rose from $30 per barrel to over $65 per barrel in 2007. But as the increase of Starbuck‘s accessibility and convenience attracted less affluent customers. Starbucks already had one store for every 12. The prediction was that it would go up to over $90 per barrel (inflationdata.Starbucks Coffee Company and 20. 5/17 . 2007). Around 50% of the consumers were now eating out less and 35% were buying less expensive brands. the extreme growth. which was roughly a 13% drop. Economic and Business Environment The increase of oil prices had dramatic effect on consumer spending. The increase of the value per customer transaction could be attributed to the average five-cent and nine-cent increases per cup of coffee by Starbucks in year 2006 and in 2007 (Allison.

and Nakamura..75 to $107.com 2009). So the retail prices of coffee beans would increase 3. 2007). ―I know.68 in the past year (dev. According to a 2007 economic research report published by USDA.‖ Sandy exclaimed. Starbucks‘ stock had dropped by 20% over the past 12 month (Helm and Goudreau. So our charge is to investigate the disparity between the accounting and financial performance. the revenues had increased 20% over the last year resulting in a 9% increase in net income in 2007. It would be a good idea to start reviewing information from the financial statements that we gathered (see Exhibit 1-5). The price plummeted from around $35 in 2006 to $23 in 2007 (YahooFinance 2009). and Zerom D.org 2009). E. 2007). a 10% change in coffee bean‘s commodity prices would translate a 3% increase of retail prices (Leibtag E. The cost of goods sold was further affected by the increase of minimum wage. Nakamura A. We should evaluate the impact of expansion on the return of the capital investment. This may help us to understand their liquidity issues mentioned by the press. There was a 20% increase over the 2005-2007 three-year period. there was only 3% drop of operating profits.6%. economic value added as well as the company‘s free cash flows and financial ratios. ―However.ico. Financial Analysis ―Can you believe despite all this.15 to $5.‖ Sandy recommended. The price of coffee beans had sky-rocketed.‖ Ronnie remarked.Starbucks Coffee Company Starbucks‘ profit was affected by the increasing cost of goods sold. The price of 100 pounds of coffee beans had increased from $95.85 in July 2007 which represented a 14% increase (Laborlawcenter. 6/17 . The minimum wage rose from $5.

7/17 . we should also consider what changes to Starbuck‘s strategies could reverse their road to failure.Starbucks Coffee Company ―Once we find out the root cause of the drop of stock price.‖ Ronnie echoed Sandy‘s suggestion. I am sure Tom will be interested in that.

IS Starbucks Pushing Prices Too High? – BusinessWeek.nwsource. Retrieved September 18. www. (EER-38) 28 pp. P.com/bwdaily/dnflash/content/jul2007/db20070801_030871.htm 8/17 . 2007. March 2007.. 2009 from http://seattletimes.: Sep 22. Nakamura A. 2009 from http://www. 2009 from http://www. 2009 from http://www.htm Starbucks Company 2007 Annual Report (2007).com (2007). Retrieved September 15.businessweek.asp.com/q/hp?s=SBUX&a=08&b=30&c=2005&d=08&e=30&f=2009&g=m Leibtag E. New York Times. 2009 from http://www. Economic Research Report No. Kevin.com (2009).inflationdata. E.com/graph/foo_mcd_res-foodmcdonalds-restaurants Helm and Goudreau.laborlawcenter.com/2009/09/16/news/companies/kevin_maney_starbucks.edgaronline.fortune/index.com/inflation/Inflation_Rate/Historical_Oil_Prices_Table. Retrieved September 12 2008 from file://E:\Starbucks\v33834e10vk Starbucks 2007. How Starbucks Lost its ‗Fidelity‖ from CNNMoney.com/mcd/our_company.com. Yahoo.Getting to Know Us – aboutmcdonalds. Retrieved September 18. 2009 from http://money.com (2009). Starbucks raises prices again.aboutmcdonalds.yahoo.ers. 2009 from http://www. The Seattle Times (2007). N.com.gov/Publications/ERR38/ Federal Minimum Wage History (2009). and Nakamura.Starbucks Coffee Company References Allison.htm?camp aign_id=twxa Historical Crude Oil Prices (Table) – inflationdata.nationmaster. Retrieved September 18.com (2009).usda. M.com/html/businesstechnology/2003803039_starbucks24. Retrieved September 15.aspx Founder Sees Lots of Room for Lots More Starbucks: [Interview] Elisabeth Malkin.Y. 2009 from http://www. MCD .html Maney.Historical Prices for Starbucks Co –Yahoo! Finance (2009). Starbucks Form 10-K.com (2009). Retrieved September 18. and Zerom D. Cost Pass-Through in the US Coffee Industry. 2009 from http://finance.C. Retrieved September 18.com/t-federal-minimum-wag. New York.html BUCX. Retrieved September 18. (Late Edition (east Coast).cnn. Retrieved September 15.2 ―Food Statistics > McDonalds restaurants (most recent) by country‖NationMaster.

A Latte Room to Grow. Retrieved September 18. N.Starbucks Coffee Company Palmer. 2007.Y: Mar 26. Lauren.htm 9/17 . 13. Jay. P22. 2009 from http://www. 24 (2 pp. 87. Iss. Starbucks competition heats up from THE ASSOCIATED PRESS. New York.) Shepherd.businessweek.com/ap/financenews/D8O0SPE80. NEW YORK (2007). Barron‘s. Vol.

056.63 0.977 494.386 6.370 — $ 494.291 906.215.927 673.212 2.178.430 76.259 $5.90 — 0.942 3.370 $ $ $ $ 0.160 489.71 766. except earnings per share Net revenues: Company-operated retail Specialty: Licensing Foodservice and other Total specialty Total net revenues Cost of sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Total operating expenses Income from equity investees Operating income Net interest and other income Earnings before income taxes Income taxes Earnings before cumulative effect of change in accounting principle Cumulative effect of accounting change for FIN 47.417 10/17 .124 3.63 — 0.665.169 361.091 $ $ $ $ 0.232 9.053.613 5.74 0.986.168 1.829 796.249 8.211 479.525 340.927 93.243 324.73 0.998.02 0.364 383.558 108.937 893. net of taxes Net earnings — basic Earnings before cumulative effect of change in accounting principle — diluted Cumulative effect of accounting change for FIN 47.844 7.006 1.894 1.87 — 0.605.214 $ 564.015 304.369.114 792.648 780.411.952 12.473 17.518 15.87 749. 2007 Oct 1.786.497 3.770 581.570 815.358 977.583. net of taxes Net earnings— diluted Weighted average shares outstanding: Basic Diluted $7.419 1.61 789.465.791 2. 2005 In thousands. net of taxes Net earnings Per common share: Earnings before cumulative effect of change in accounting principle — basic Cumulative effect of accounting change for FIN 47.413.999.945 2.203.556 $ $ $ $ 0.098 860.726 672.136 467.338 386.763 770.76 0.Starbucks Coffee Company Exhibit 1 – Starbucks 2007 Income Statement Financial Statements and Supplementary Data STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS Fiscal Year Ended Sept 30.347 301.265 1.889 294.911 192.638 $6.026.687.724 387.373 6.676 343.815 253. 2006 Oct 2.165.300 2.638 — $ 672.391.61 — 0.90 0.02 0.

000 shares.393 2. except share data ASSETS Current assets: Cash and cash equivalents Short-term investments — available-for-sale securities Short-term investments — trading securities Accounts receivable. Oct 1.000.366 54.271 636.059.043 215.917 37.846 2.926 762 1.121 354.874 88.343.857 2.516 257.506 $4. 738.496 224.811 219.658 148.000 340.287. net Other assets Other intangible assets Goodwill TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Commercial paper and short-term borrowings Accounts payable Accrued compensation and related costs Accrued occupancy costs Accrued taxes Other accrued expenses Deferred revenue Current portion of long-term debt Total current liabilities Long-term debt Other long-term liabilities Total liabilities Shareholders‘ equity: Common stock ($0.761 $ 700.878 756 39.284.343.757 129.228. respectively.001 par value) — authorized.248 390.Starbucks Coffee Company Exhibit 2 – Starbucks 2007 Balance Sheet STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS Fiscal Year Ended Sept 30.890. issued and outstanding.084 37.925 691.958 262.941 $ 710.435 738 39.155. plant and equipment.448 common stock units in both periods) Other additional paid-in-capital Retained earnings Accumulated other comprehensive income Total shareholders‘ equity TOTAL LIABILITIES AND SHAREHOLDERS‘ EQUITY .620 2.331 74.154 231.696.422 42.200.606 87.273 2.453 1.420.868 94.900 775 2.620 1.955 161.200.285 and 756.566 550.285. net Total current assets Long-term investments — available-for-sale securities Equity and other investments Property.428.261 83. $ 281.529.937 288.478 $4.542 53.941 11/17 .428.899 186. net Inventories Prepaid expenses and other current assets Deferred income taxes.151. (includes 3.022 258.393 2.963 54.074 3.602.777 1.935. 2007 2006 In thousands.845 73. 1.487 21.591 92.093 2.836 332.071 shares.117 $5.788 5.625 $5.189.433 219.369 296.878 $ 312.222 126.588 287.010 224.

259 $ — 491.435 53.555 — (735) — (1.201.181 (91.647) — (673.230) (841. 2005 OPERATING ACTIVITIES: Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of accounting change for FIN 47.437) 1.960 (996.618) 9. net of cash acquired Net purchases of equity.167 47.547 (41.368) 2.464 (31.622 (84.060 227.424 132.089 (1.725 56.080. other investments and other assets Net additions to property.113 (21.068 38.223 $ 274.093) 1.000 176.207 19.Starbucks Coffee Company Exhibit 3 – Starbucks 2007 Income Statement STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Year Ended Sept 30.488) 469.276 (6.326) 3.055) 653 (48.827) 283 28.734) (39.326) (65.625 19.055 (784) 548.261 $ 312.293) (56.324) (60.798) (3.193) 1.422) 178.134 431.199) (771.756 145.664 1.583) (7.919 — 109.600.040) — — (993.915) (643.638 $ 564.000 163.809 $ 312. net of taxes Depreciation and amortization Provision for impairments and asset disposals Deferred income taxes.576) 36.294 $ 10. plant and equipment Net cash used by investing activities FINANCING ACTIVITIES: Repayments of commercial paper Proceeds from issuance of commercial paper Repayments of short-term borrowings Proceeds from short-term borrowings Proceeds from issuance of common stock Excess tax benefit from exercise of stock options Principal payments on long-term debt Proceeds from issuance of long-term debt Repurchase of common stock Other Net cash used by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS: Beginning of period End of the period SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest. net of capitalized interest Income taxes $ 672.915 (643.221 (237.576 $ 342.570) 49.841) 17.527) 104.249 117.812 See Notes to Consolidated Financial Statements.717 22.045) — (155.253) (49.311.937 93.554 626.233 (16.371 63.370 — 367.113.093 159.131.505) (171.606 $ $ $ 35.134 $ 1.606 173.416.530 138.345) 17.053 173.214 412.887) 11.192) 269.238 26.865 7.272 (31.978 — 10.032 (37.348) (1.470. 2007 Oct 1.296) (220.927 103.951) (16.809 281.797 494.705 (93.615) — — — 277.097 (121.711 14.743) 65. 12/17 .331.628 86.633 (639.318 (117. net Equity in income of investees Distributions of income from equity investees Stock-based compensation Tax benefit from exercise of stock options Excess tax benefit from exercise of stock options Net amortization of premium on securities Cash provided/(used) by changes in operating assets and liabilities: Inventories Accounts payable Accrued compensation and related costs Accrued taxes Deferred revenue Other operating assets and liabilities Net cash provided by operating activities INVESTING ACTIVITIES: Purchase of available-for-sale securities Maturity of available-for-sale securities Sale of available-for-sale securities Acquisitions. 2006 In thousands Oct 2.966 54.013 (85.851) 922.552) (1.238 105.497 (53.537) 30.000) 770.368 (898) — (854.

201 $ — — — — — — — 13 107.677) (8. including tax benefit of $108.246 2 46.162) 39.366 $ — 46.727 37.727 689.393 $1.380) 37.638 — — — — — — — — — — 42.618 — 107.504 (45) (1.592 580.373 — 225.370 350 350 (8.228.272 — — — — 39.117 13/17 .393 $2. October 2.469.444.233 — — — (352. including tax benefit of $1.828 — (1.393 $2.139.285.505 — (1.738 235. net Translation adjustment.811.620 $ 2.563.592 14.638 (20. 2004 Net earnings Unrealized holding gain.506 — 672. including tax benefit of $116.169.602.936 — 494.110 $ — — — — 13.534) 767.285 2 42.043 — 239.205) 767 $ 90.262 — 564.103.356) 39. net of tax Comprehensive income Stock-based compensation expense Exercise of stock options.969.250) 20.432) 738 $ — $ — — — (634.Starbucks Coffee Company Exhibit 4 .284.259 — — — — — — — — — — 34.826 (33) (378.151.380) (20.012.071 $ — — — — 12.744.634 (25.985 — 106. net Translation adjustment.729 1.924 Repurchase of common stock Balance.259 1.649 (26) (475. October 1. including tax benefit of $1.139.048) 37.222.938.241 $ 2.428 Sale of common stock.419) 738.189.442.012 — — 1 34.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Common Stock Shares Amount Additional Other Additional Paid-in Paid-in Retained Capital Capital Earnings In thousands. net Translation adjustment.914 $ 2. net of tax Comprehensive income Stock-based compensation expense Exercise of stock options.407 (32.767 1.964 (45.226 1.285 $ 16 239.550 Repurchase of common stock Balance. October 3.762 Sale of common stock. including tax benefit of $95. net of tax Comprehensive income Exercise of stock options.373 225.890 $ — — — 39. except share data Accumulated Other Comprehensive Income/(Loss) Total Balance.821) 54. September 30.393 $1.651 — (828. 2005 Net earnings Unrealized holding gain. 2007 794.738 — 235.992 1.276 Sale of common stock.908.987 $ — 564.688 $ — — — 795 $ — — — 955.028 16.544.273 $ 2. including tax provision of $139 Repurchase of common stock Balance.607. 2006 Net earnings Unrealized holding loss.370 — — — — 29.084 $ — 672.617 $ — 494.677) 486.767 14.402) 756.090.860) 756 $ — $ — — — — — — — 13 106.

The interest rate for borrowings under the facility ranges from 0. Starbucks purchased the land and building comprising its York County. the Company issued $550 million of 6. of which $100 million may be used for issuances of letters of credit. As of September 30. 2006. The notes were priced at a discount.50%. 2006. 2007.0%. The Company may issue commercial paper from time to time. 57 14/17 . with interest rates from 0. As of September 30. which limit future liens and sale and leaseback transactions on certain material properties.27% over LIBOR or an alternate base rate. 2007. capital expenditures and other corporate purposes. commencing February 15. The notes require the Company to maintain compliance with certain covenants.25% Senior Notes (the ―notes‖) due in August 2017. in an underwritten registered public offering. As of September 30. which may include acquisitions and share repurchases. The remaining maturities of these loans range from three to four years. resulting in proceeds to the Company of $549 million. The facility is available for working capital. a letter of credit of $11. which may include acquisitions and share repurchases. As of September 30. the Company had $710 million in borrowings outstanding under the program with a weighted average interest rate of 5. the Company was in compliance with each of these covenants. with individual maturities that may vary. The facility contains provisions requiring the Company to maintain compliance with certain covenants. As of September 30. up to a maximum aggregate amount outstanding at any time of $1 billion. the Company also had $12. 2007. Long-term Debt In August 2007. but not exceed 397 days from the date of issue. the Company had no borrowings under this credit facility. As of September 30. including a minimum fixed charge coverage ratio which measures the Company‘s ability to cover financing expenses. leaving a total of $275 million in remaining borrowing capacity under the combined revolving credit facility and commercial paper program. the Company had $700 million outstanding under the facility with a weighted average interest rate of 5. In 1999.0 million remained outstanding on these loans. before expenses. capital expenditures and other corporate purposes. In March 2007.Starbucks Coffee Company Exhibit 5– FOOTNOTE TO BALANCE SHEET DEBT Footnote Note 9: Revolving Credit Facility and Commercial Paper Program The Company has a $1 billion unsecured credit facility (the ―facility‖) with various banks. Pennsylvania roasting plant and distribution facility and assumed certain related loans from the York County Industrial Development Corporation.5%. The facility is currently set to terminate in August 2011. As of October 1. The specific spread over LIBOR will depend upon the Company‘s long-term credit ratings assigned by Moody‘s and Standard and Poor‘s rating agencies and the Company‘s coverage ratio.11% to 0. $2.0% to 2. The program is backstopped by the Company‘s revolving credit facility. and the combined borrowing limit is $1 billion for the program and the facility. and the proceeds of the commercial paper financing will be used for working capital. 2008. the Company was in compliance with each of these covenants. 2006.9 million was outstanding. As of October 1.4%. the Company established a commercial paper program (the ―program‖). Under the program the Company may issue unsecured commercial paper notes. 2007. Interest is payable semi-annually on February 15 and August 15 of each year.9 million in letters of credit outstanding under the revolving credit facility. 2007. 2007 and October 1. which is the greater of the bank prime rate or the Federal Funds Rate plus 0.

and were part of the Company‘s active capital management program. plant and equipment. 2007 Oct 1. 2006 and 2005. 2006 Deferred rent Asset retirement obligations Minority interest Other Total $ 271.9 million and $2. guarantees. Starbucks acquired 25. the Starbucks Board of Directors authorized the repurchase of up to 25 million additional shares of the Company‘s common stock. 15/17 . in which Starbucks owns less than 100% of the equity interest. Note 12: Shareholders’ Equity In addition to 1. net of interest capitalized.2 billion shares of authorized common stock with $0.000 $551. was $38. rent escalation clauses and rent holidays related to certain operating leases.252 21.074 $ 203. 2007. available-for-sale securities. 2007. 2007. Minority interest represents the collective ownership interests of minority shareholders for operations accounted for under the consolidation method.72 for a total accrual-based cost of $1.6 million shares at an average price of $32. The other remaining long-term liabilities generally include obligations to be settled or paid for one year beyond each period presented. The related cash amount used to repurchase shares in fiscal 2006 totaled $854 million. $8.944 $ 262.Starbucks Coffee Company Scheduled principal payments on long-term debt are as follows (in thousands): Fiscal Year Ending 2008 2009 2010 2011 2012 Thereafter Total principal payments Interest Expense $ 775 789 337 56 — 550.957 Interest expense. The difference between the two amounts represents the effect of the net change in unsettled trades totaling $26 million from October 2. net.416 $ 354.‖ on the consolidated balance sheet. the Company has authorized 7. respectively. under the current authorization. Under the Company‘s authorized share repurchase program.5 million shares remained available for repurchase.0 million shares at an average price of $30. of interest was capitalized for new store construction and included in ―Property. the long-term portion of capital lease obligations and donation commitments. for items such as hedging instruments. The difference between the two amounts represents the effect of the net change in unsettled trades totaling $16 million from October 1. The related cash amount used to repurchase shares in fiscal 2007 totaled $997 million. 2005.34 for a total accrual-based cost of $828 million during fiscal 2006.4 million and $1. cash equivalents.001 par value per share. In fiscal 2007 and 2006. Starbucks acquired 33. Note 10: Other Long-term Liabilities The Company‘s other long-term liabilities consist of the following (in thousands): Fiscal Year Ended Sept 30.7 million. respectively. $3.2 million.857 Deferred rent liabilities represent amounts for tenant improvement allowances. On May 1. Asset retirement obligations represent the estimated fair value of the Company‘s future costs of removing leasehold improvements at the termination of leases for certain stores and administrative facilities.736 43. 2006. borrowings under the revolving credit facility and commercial paper program and proceeds from sale of the notes.739 13. No interest was capitalized in fiscal 2005. As of September 30.670 17.5 million shares of preferred stock.271 10. The Company amortizes deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements of earnings.903 34. a total of up to 13.3 million in fiscal 2007.0 billion in fiscal 2007. Share repurchases were funded through cash. none of which was outstanding at September 30.

09 25.5 7.99 0.11 12.19 13.59 29.64 26.79 0.84 9 35 44 3.67 29.07 25.02 1.07 23.89 20.34 -0.92 14.4 3.57 13.58 26.34 11.32 21.73 9 33 42 3.58 1.62 1.2 13.81 14.39 2006 0.26 4.38 11.57 2004 1.35 -0.79 0.75 1.75 7.46 3.06 0.65 23.15 12.5 29.14 16/17 .49 1.73 2005 0.14 17.05 12.09 10.01 10. 2007 LIQUIDITY Current Ratio Quick Ratio Working Capital Per Share Cash Flow Per Share EFFICIENCY Inventory Turnover Receivables Turnover Total Asset Turnover Average Collection Period (Days) Days to Sell Inventory Operating Cycle (Days) PERFORMANCE Sales/Net Property.73 12.05 10.95 11.64 7.81 26. Plant & Equip Sales/Stockholder Equity PROFITABILITY Operating Margin Before Depr (%) Operating Margin After Depr (%) Pretax Profit Margin (%) Net Profit Margin (%) Return on Assets (%) Return on Equity (%) Return on Investment (%) Return on Average Assets (%) Return on Average Equity (%) Return on Average Investment (%) PROFITABILITY BASED ON CORE EARNINGS Return on Assets (%) Return on Equity (%) Return on Investment (%) Return on Average Assets (%) Return on Average Equity (%) Return on Average Investment (%) 0.36 37.47 13.76 17.8 10.52 15.77 29.39 11.45 23.76 14.6 26.85 41.25 38.81 1.24 23.54 1.62 12.05 11.96 10 35 44 3.29 15.17 15.52 1.76 12.81 26.41 2.22 7.Starbucks Coffee Company Exhibit 6 – RATIO ANALYSIS STARBUCKS CORP ANNUAL RATIO REPORT Statement ended in September 30.93 10 32 42 3.25 10.47 14.14 19.05 16.65 19.27 11.14 15.41 -0.98 25.86 10.31 36.43 20.76 0.28 10.97 13.49 15.54 11. 2007.4 13.66 21.93 26.12 15.13 26.79 15.

5 15.38 0.2 31.37 0 0 17/17 . LEVERAGE Interest Coverage Before Tax Interest Coverage After Tax Long-Term Debt/Common Equity (%) Long-Term Debt/Shrhldr Equity (%) Total Debt/Invested Capital (%) Total Debt/Total Assets (%) Total Assets/Common Equity DIVIDENDS Dividend Payout (%) Dividend Yield (%) 26.66 2.Starbucks Coffee Company Exhibit 6 – RATIO ANALYSIS Continued.98 24.17 24.15 0.13 1.2 0.99 0 0 613.64 53.06 1.09 16.15 0.22 13.22 0.45 8.68 0 0 0.96 1.31 23.18 0.34 0 0 82.17 44.36 0.65 381.

Sign up to vote on this title
UsefulNot useful