Starbucks financial statement analysis

Starbucks 2014 Annual Report Income Statement Net Revenues Cost of sales Gross margin Store operating expenses other operating expenses D & A Exp G&A Exp Litigation Charge #DIV/0! Total Operating Expenses Income from Equity Investees Operating Income Interest income Interest Expense Earnings before taxes Income tax expenses Net Earnings The vertical analysis shows some interesting things. First that the bottom line reveals basically nothing -- the net income in 2013 is entirely a reflection of the litigation charge for a lawsuit the company lost.

So to understand the actual trend in the business one needs to look at the other line items. Top line revenue is increasing at a fairly rapid rate, up 10% in 2014 and almost 12% in 2013. This reveals that Starbucks in this period was in a period of steady, rapid growth. The growth was spread across different business units as well, indicating a healthy broad-based growth for the company. Most expense categories grew at a slower rate than revenues, which highlights greater operational efficiency throughout the company.

In particular, store operating expenses grew at 9.4% and 8.4% in 2013 and 2014 respectively. This indicates that the company was able to increase revenues at its stores faster than costs, and those increased margins can be expected to have a positive impact on the company's overall financial health. Depreciation expenses grew more quickly than the overall expense base, but are a smaller category. The figures below the litigation charge are not all that useful because of the distortion provided by the litigation charge.

Normally, unusual expenses are held separate from ongoing expenses, so Starbucks' rendering of its statements in this way seems like deliberate obfuscation. Starbucks 2014 Annual Report Income Statement 2012 2013 2014 Net Revenues 10534 11793 12977.9 Cost of sales Gross margin Store operating expenses other operating expenses D & A Exp G&A Exp Litigation Charge 0 #DIV/0! -20.2 #DIV/0! Total Operating Expenses 11490.1 15443.6 13635 Income from Equity Investees Operating Income 1997.4 -325.4 -16.29% Interest income 94.4 Interest Expense -32.7 -28.1 85.93% -64.1 Earnings before taxes 2059.1 -229.9 -11.17% Income tax expenses -238.7 -35.39% Net Earnings 8.8 0.64% 2068.1 The horizontal analysis reveals some other things.

First, cost of sales grows faster than the net revenues in this model -- mainly in 2013. While other costs are often lower, than one-time gain in cost of sales reflects in a two-year increase in COS that is higher than the increase in revenue. However, other costs are not increasing as quickly. The result is that the net earnings ended up growing faster in 2014 than they did in 2012.

On the balance sheet, the horizontal analysis says the following: Balance Sheet Current Assets 2013 2014 Cash 66.3% ST Investments 20.6% A/R Inventories 98.2% Prepaid Exp 99.3% Deferred Taxes Current Assets 76.2% LT Investments 58.3 Equity and cost inv PPE Deferred Taxes 93.4% Other Other intangible 99.5% Goodwill 99.2% Total Assets 11516.7 10752.9 93.4% #DIV/0! Current Liabilities A/P #REF! Accrued litigation 0 0.0% Accrued liabilities Insurance reserves Deferred Revenue Total C. L. 56.5% LT debt 2048.3 Other LT Liabilities Total Liabilities 77.9% Shareholders' Equity 87.5% Common Stock 0.8 0.7 #REF! Paid-In Capital 39.4 14.0% Retained Earnings Acc.

Other Income 67 25.3 37.8% Noncontrolling Int 2.1 1.7 81.0% Total Equity Total Liabilities & Equity 11516.7 10752.9 93.4% Notable is the decline in assets during a period when retained earnings increased 26%. This reflects, most likely, the losses on account on that litigation. The litigation is baked into these figures, in the sense that the company has excess cash on hand (to pay), and ends up with higher long-term debt in 2014 as well. Current liabilities, which include this litigation payment, are much lower in 2014.

Most current asset classes related to operations -- inventory and accounts receivable, for example, are close to their 2013 figures, but the cash and short-term investments are much lower. The balance sheet basically tells the story of a company that owes a lot of money on a settlement and is preparing to make that payment. But despite that, it was successful enough that not only did its total liabilities drop (as.