Starbucks Financial Analysis: Growth, Strategy & Competition

Introduction

Over the past 20 years, Starbucks has experienced both periods of strong growth and periods of retraction, most notably during the Great Recession. The company's investment strategies should have reflected its strategic priorities during this period, and an analysis of the company's financials over this time illustrates that clearly. Starbucks' growth since 1998 has mainly been in overseas markets, but the company has also branched out into other business lines in an attempt to diversify its income streams. Today, Starbucks appears to have settled into more of a "cash cow" state, in which the company is earning healthy returns from its businesses and is focused on growth mainly in certain overseas markets where the coffee market remains more nascent — in other words, where there is still high growth potential going forward.

Starbucks Income Statement

Starbucks has been a strong growth story for most of this period. According to the 1999 Annual Report, the company earned $1.309 billion in 1998 and steadily grew that figure through the 2008 fiscal year, when it recorded revenue of $10.383 billion (Macrotrends, 2019). The 2009 fiscal year saw a decline in revenue for the first time since the company went public. Since that point, however, the company restored its positive growth trajectory, and in 2018 it recorded revenue of $24.719 billion.

The company's net earnings have followed a similarly positive long-run trajectory. In 1998, net income was $68 million. This figure grew to $672 million in the 2007 fiscal year. The recession hit, and net income dropped to $311.7 million, recovering only slightly in 2009. For the most part, since that point Starbucks has seen its net income grow steadily, reaching $4.5 billion in 2018. There was one notable exception: in 2013, the company had an arbitrator's decision go against it, resulting in a $2.8 billion payment to Kraft Foods for prematurely terminating a distribution deal (Sharf, 2013). That blip aside, Starbucks has seen both its top and bottom lines grow steadily over the course of the past twenty years, save for the 2008–2009 recession period, when the company was forced to retrench and even close a large number of stores. This move coincided with the return of former CEO Howard Schultz, who had left the company but came back to restore it to growth (The Coffee Brewers, 2008).

Balance Sheet and Capital Structure

Decisions regarding the financing of this steady growth are reflected on the company's balance sheet. At the end of the 1998 fiscal year, Starbucks had just under $1 billion in total assets, approximately one-third of which were current assets. The company carried minimal leverage, with shareholders' equity amounting to 80% of the capital structure. In 2009, growth flatlined, but resumed as the company emerged from the recession. Starbucks now carries a book value of assets of $24.156 billion.

One key question is whether the company would alter its capital structure based not only on its strategy, but also on the prevailing financing environment — which included an exceptionally long period of near-zero interest rates. By 2005, liabilities had already risen to 40% of total assets, and stood at 45% by the time growth slowed in 2009. Those low interest rates allowed Starbucks to use debt as its primary mode of financing growth over the subsequent decade. By 2016, liabilities accounted for 58% of the capital structure, and the company had grown its long-term debt significantly.

In the 2018 fiscal year, however, Starbucks underwent a dramatic shift in its approach to financing. Liabilities rose to 95% of the capital structure. The company issued a substantial amount of new debt across several offerings and committed a significant portion of those proceeds to share buybacks. As a consequence, retained earnings fell from $5.563 billion in 2017 to $1.457 billion in 2018. The company also committed to paying higher dividends as part of a plan to return up to $25 billion to shareholders.

This program is extraordinary, and it is the work of CEO Kevin Johnson. It marks a stark departure from the approach followed by Howard Schultz (Cannivet, 2019). The strategy is more consistent with a company that sees itself as exiting a growth stage and entering a cash cow stage. The accumulation of capital is an important part of any growth stage, and under Schultz that capital accumulation was central to the business model. Borrowing had steadily increased, but with an eye toward fueling growth — particularly through massive opportunities across Asia, where Starbucks invested substantially in building its business in China, India, and elsewhere. The current approach leaves less capital available for such growth, especially given further commitments through 2025 to return cash to shareholders.

This approach also carries significant risk because of the high degree of leverage. A capital structure that is 95% liabilities is only viable for a company that believes it has very low risk in its ongoing operations. A reliable cash flow allows a company to take on substantial leverage, which not only provides opportunities for returning capital to shareholders but also lowers the overall cost of capital. Strategically, this financial shift reveals how the company perceives itself and how that perception has changed. The dramatic nature of the change is more attributable to the new CEO than to any sudden shift in the company's underlying business; Starbucks has effectively operated as a cash cow in its established markets for years, with growth concentrated in a handful of major Asian markets.

References

Cannivet, M. (2019). Starbucks' big stock buyback limits future upside. Forbes. Retrieved October 4, 2019, from https://www.forbes.com/sites/michaelcannivet/2019/08/29/starbucks-big-stock-buyback-limits-future-upside/#26c434067047

Hawley, J. (2019). Who are Starbucks' main competitors? Investopedia. Retrieved October 4, 2019, from https://www.investopedia.com/articles/markets/101315/who-are-starbucks-main-competitors.asp

Macrotrends. (2019). Starbucks financial statements. Macrotrends.com. Retrieved October 4, 2019, from https://www.macrotrends.net/stocks/charts/SBUX/starbucks/financial-statements

Marketwatch. (2019). McDonald's financials. MarketWatch. Retrieved October 4, 2019, from https://www.marketwatch.com/investing/stock/mcd/financials

Sharf, S. (2013). Starbucks ordered to pay Kraft $2.8 billion. Forbes. Retrieved October 4, 2019, from https://www.forbes.com/sites/samanthasharf/2013/11/12/starbucks-ordered-to-pay-kraft-2-8-billion/#5516b7fa167d

Starbucks 1999 Annual Report. Retrieved October 4, 2019, from

The Coffee Brewers. (2008). With Starbucks closing 600 shops, is the coffee business still lucrative? The Coffee Brewers. Retrieved October 4, 2019, from https://www.thecoffeebrewers.com/starbucks.html