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 expected ex-litigation) but retained earnings and total equity increased, illustrating underlying growth.
The vertical analysis tells a similar tale. Cash was overloaded among asset classes, replaced in 2014 with an increase in long-term debt to offset the reduction in cash to pay for that litigation settlement. With the reduction in current assets as a class, certain fixed asset categories increased in percentage terms, in particular the plant, property and equipment. But the litigation does obscure some details. Inventories were a higher percentage of assets, which is normally bad, but they were lower during a year when revenue increased. So context matters here.
On the liabilities side, current liabilities not surprisingly declined quite a bit in 2014, as did total liabilities. The value of the company declines, so retained earnings increased substantially as a percentage of the total value of the company. Over two years, where there was such a major transaction, it is hard to ascertain much about long-run trends from a vertical analysis, unfortunately.
References
Current Assets
2013
2014
Cash
22.4%
15.9%
ST Investments
5.7%
1.3%
A/R
4.9%
5.9%
Inventories
9.6%
10.1%
Prepaid Exp
2.5%
2.7%
Deferred Taxes
2.4%
3.0%
Current Assets
47.5%
38.8%
LT Investments
58.3
0.5%
3.0%
Equity and cost inv
4.3%
4.8%
PPE
27.8%
32.7%
Deferred Taxes
8.4%
8.4%
Other
1.6%
1.8%
Other intangible
2.4%
2.5%
Goodwill
7.5%
8.0%
Total Assets
11516.7
10752.9
Current Liabilities
A/P
4.27%
4.96%
Accrued litigation
24.17%
0
0.00%
Accrued liabilities
11.02%
14.08%
Insurance reserves
1.55%
1.82%
Deferred Revenue
5.68%
7.39%
Total C. L.
46.69%
28.26%
LT debt
11.28%
2048.3
19.05%
Other LT Liabilities
3.11%
3.65%
Total Liabilities
61.08%
50.96%
Shareholders' Equity
Common Stock
0.8
0.01%
0.7
0.01%
Paid-In Capital
2.45%
39.4
0.37%
Retained Earnings
35.86%
48.42%
Acc. Other Income
67
0.58%
25.3
0.24%
Noncontrolling Int
2.1
0.02%
1.7
0.02%
Total Equity
38.92%
49.04%
Total Liabilities & Equity
You’re 100% through this paper. Sign up to read the full paper.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.