Starbucks Café is the industry leader in the coffeehouse industry with annual sales in 2017 of $22.38 billion. As of May 28, 2018, the price of Starbucks common stocks whose ticket symbol in the NYSE is Nasdaq was $57.92 (“Starbucks corporation”, 2018). The company has endured a long history of financial success and its common stocks are considered a blue-chip stock. Investors, managers, and other stakeholder groups often must utilize financial tools to evaluate the financial performance of a firm. Two quantitative techniques that can be used to evaluate the finances of a company based on its financial statements are vertical analysis and horizontal analyses. The purpose of this paper is to utilize both tools to assess the performance of Starbucks Café during fiscal years 2016 and 2017.

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Horizontal Analysis
Horizontal analysis shows the increase or decrease of the accounts of the financial statements of a company from year to year. A horizontal analysis of Starbucks Café for 2016 and 2017 is illustrated in Appendix A and B. The revenues of the company in 2017 increased by 5.01% since the previous year. The increment in sales is a favorable sign. Starbucks obtained a net income in 2017 of $2.88 billion. Its net income increased by 2.38% in comparison with 2016.  The company could have achieved a higher increase in profitability if its cost of goods sold and operating expenses had not gone up in 2017 by 15.59% and 6.76% respectively. Starbucks obtained a superb interest income increment of 154.91% as its interest income went from $108 million in 2016 to $275.3 billion in 2017. Income taxes rose by 3.83%, but a growth is taxes was expected since the company reported to the IRS higher revenues. The EBIT of the organization increased by 2.83%.

The total assets of Starbucks in 2017 went up by a moderate 0.37%. However, the total liabilities went up by 5.37% which is a negative sign since higher debt increases the interest expense of an organization and reduces the credit capacity of a corporation. In 2017 the equity of the firm reduced by 7.36%. Cash is one of the most important assets a business possess since it is its most liquid asset and it is used both to pay for operating expenses and debt obligations (Ross, 2018). In 2017 the total cash of Starbucks Café was $2,462.3. The company’s cash account rose by 15.67% in 2017 which helped the company improve its liquidity.

Vertical Analysis
Vertical analysis is an analytic technique that compares the items in the income statement and balance sheet against sales and total assets. Appendix C and D shows a vertical analysis performed on the financial statements of Starbucks Café related to 2016 and 2017. The total liabilities of the company rose by 58.84% in relation to its assets in 2017, while the equity of the firm rose by 41.16%. The net income in relation to sales which reflects the net margin went by up in 2017 by 13.22. In comparison with the industry standard the net margin of Starbucks is 8.42% higher (“Key Business Ratios”, 2018). The vertical analysis demonstrated that the cost that the company must manage the most is cost of goods sold since it represents nearly 44% of its costs. To lower cost of goods, the company must find a way to replace some of the raw materials used to build its clothes with cheaper materials. In order to decrease operating costs the organization can outsourcing manufacturing contracts to countries with expertise in apparel such as India. The future of Starbucks Café is bright if the company continues to provide its customer a superb produce and a great drinking experience.

Appendix A: Income Statement Horizontal Analysis SBUX

Increase or decrease
2017 2016 Amount Percent
Revenues 22383.8 21315.9 1067.9 5.01%
Cost of sales 9838.2 8511.1 1327.1 15.59%
Store operating expenses 6493.3 6064.3 429 7.07%
Other operating expenses 553.8 545.4 8.4 1.54%
Depreciation and amortization expense 1011.4 980.8 30.6 3.12%
General and administrative expense 1393.3 1360.6 32.7 2.40%
Restructuring and impairment 153.5 0 153.5
Total operating expenses 18643.5 17462.2 1181.3 6.76%
Income from equity investees 391.4 318.2 73.2 23.00%
Operating income 4134.7 4171.9 -37.2 -0.89%
Gain resulting from acquisition 0 0 0
Loss on extinguishment 0 0 0
Interest income 275.3 108 167.3 154.91%
Interest expense -92.5 -81.3 -11.2 13.78%
Earnings before income taxes 4317.5 4198.6 118.9 2.83%
Income tax expense 1432.6 1379.7 52.9 3.83%
Net earnings including noncontrolling interest 2884.2 2818.9 65.3 2.32%
Net earnings attributed to noncontrolling interest 0.2 1.2 -1 -83.33%
Net earnings attributed to Starbucks 2884.7 2817.7 67 2.38%

Appendix B: Balance Sheet Horizontal Analysis SBUX

Assets Increase or decrease
Current assets: 2017 2016 Amount Percentage
Cash 2462.3 2128.8 333.5 15.67%
Short-term investments 228.6 134.4 94.2 70.09%
Account receivable 870.4 768.8 101.6 13.22%
Inventories 1364 1378.5 -14.5 -1.05%
Prepaid expenses 358.1 347.4 10.7 3.08%
Total current assets 5283.4 4757.9 525.5 11.04%
Long-term investment 542.3 1141.7 -599.4 -52.50%
Equity and cost investments 481.6 354.5 127.1 35.85%
Property, plant, and equipment 4919.5 4533.8 385.7 8.51%
Deferred income taxes 795.4 885.4 -90 -10.16%
Other long-term assets 362.8 403.3 -40.5 -10.04%
Other intangible assets 441.4 516.3 -74.9 -14.51%
Goodwill 1539.2 1719.6 -180.4 -10.49%
Total assets 14365.6 14312.5 53.1 0.37%
Liabilities and Equity
Current liabilities:
Account payable 782.5 730.6 51.9 7.10%
Accrued liabilities 1934.5 1999.1 -64.6 -3.23%
Insurance reserves 215.2 246 -30.8 -12.52%
Stored value and liability 1288.5 1171.2 117.3 10.02%
Current portion of long-term debt 0 399.9 -399.9 -100.00%
Total current liabilities 4220.7 4546.8 -326.1 -7.17%
Long-term debt 3932.6 3185.3 747.3 23.46%
Other long-term debt 755.3 689.7 65.6 9.51%
Total liabilities 8908.6 8421.8 486.8 5.78%
Shareholders’ Equity:
Common stock 1.4 1.5 -0.1 -6.67%
Additional paid-in capital 41.1 41.1 0 0.00%
Retained earnings 5563.2 5949.8 -386.6 -6.50%
Accumulated other comprehensive loss -155.6 -108.4 -47.2 43.54%
Total shareholders’ equity 5450.1 5884 -433.9 -7.37%
Non-controlling interests 6.9 6.7 0.2 2.99%
Total equity 5457 5890.7 -433.7 -7.36%
Total Liabilities and Equity 14365.6 14312.5 53.1 0.37%

 

Income Statement Vertical Analysis SBUX

2017 % of Sales 2016 % of Sales
Revenues 22383.8 100.00% 21315.9 100.00%
Cost of sales 9838.2 43.95% 8511.1 39.93%
Store operating expenses 6493.3 29.01% 6064.3 28.45%
Other operating expenses 553.8 2.47% 545.4 2.56%
Depreciation and amortization expense 1011.4 4.52% 980.8 4.60%
General and administrative expense 1393.3 6.22% 1360.6 6.38%
Restructuring and impairment 153.5 0.69% 0 0.00%
Total operating expenses 18643.5 83.29% 17462.2 81.92%
Income from equity investees 391.4 1.75% 318.2 1.49%
Operating income 4134.7 18.47% 4171.9 19.57%
Gain resulting from acquisition 0 0.00% 0 0.00%
Loss on extinguishment 0 0.00% 0 0.00%
Interest income 275.3 1.23% 108 0.51%
Interest expense -92.5 -0.41% -81.3 -0.38%
Earnings before income taxes 4317.5 19.29% 4198.6 19.70%
Income tax expense 1432.6 6.40% 1379.7 6.47%
Net earnings including noncontrolling interest 2884.2 12.89% 2818.9 13.22%
Net earnings attributed to noncontrolling interest 0.2 0.00% 1.2 0.01%
Net earnings attributed to Starbucks 2884.7 12.89% 2817.7 13.22%

Balance Sheet Vertical Analysis SBUX

Assets
Current assets: 2017 % of Assets 2016 % of Assets
Cash 2462.3 17.14% 2128.8 14.87%
Short-term investments 228.6 1.59% 134.4 0.94%
Account receivable 870.4 6.06% 768.8 5.37%
Inventories 1364 9.49% 1378.5 9.63%
Prepaid expenses 358.1 2.49% 347.4 2.43%
Total current assets 5283.4 36.78% 4757.9 33.24%
Long-term investment 542.3 3.77% 1141.7 7.98%
Equity and cost investments 481.6 3.35% 354.5 2.48%
Property, plant, and equipment 4919.5 34.25% 4533.8 31.68%
Deferred income taxes 795.4 5.54% 885.4 6.19%
Other long-term assets 362.8 2.53% 403.3 2.82%
Other intangible assets 441.4 3.07% 516.3 3.61%
Goodwill 1539.2 10.71% 1719.6 12.01%
Total assets 14365.6 100.00% 14312.5 100.00%
Liabilities and Equity
Current liabilities:
Account payable 782.5 5.45% 730.6 5.10%
Accrued liabilities 1934.5 13.47% 1999.1 13.97%
Insurance reserves 215.2 1.50% 246 1.72%
Stored value and liability 1288.5 8.97% 1171.2 8.18%
Current portion of long-term debt 0 0.00% 399.9 2.79%
Total current liabilities 4220.7 29.38% 4546.8 31.77%
Long-term debt 3932.6 27.38% 3185.3 22.26%
Other long-term debt 755.3 5.26% 689.7 4.82%
Total liabilities 8908.6 62.01% 8421.8 58.84%
Shareholders’ Equity:
Common stock 1.4 0.01% 1.5 0.01%
Additional paid-in capital 41.1 0.29% 41.1 0.29%
Retained earnings 5563.2 38.73% 5949.8 41.57%
Accumulated other comprehensive loss -155.6 -1.08% -108.4 -0.76%
Total shareholders’ equity 5450.1 37.94% 5884 41.11%
Non-controlling interests 6.9 0.05% 6.7 0.05%
Total equity 5457 37.99% 5890.7 41.16%
Total Liabilities and Equity 14365.6 100.00% 14312.5 100.00%
    References
  • Key Business Ratios (2018). Dun & Bradstreet. Retrieved from http://www.dnb.com
  • Ross, S. (2018). What items in the balance sheet are most important in fundamental analysis? Investopedia. Retrieved from https://www.investopedia.com/ask/answers/050615/what-items-balance-sheet-are-most-important-fundamental-analysis.asp
  • Starbucks Café (SBUX). (2018). Yahoo. Retrieved from https://finance.yahoo.com/quote/SBUX?p=SBUX