Annual Report

STARBUCKS Jiayi Liu

Financial Accounting Summer

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-irhome

Introduction

Name of chief executive officer:

Howard Schultz

Location of home office:

2401 Utah Avenue South, Seattle,

Washington 98134

Ending date of latest fiscal year:

September 30, 2012

Principal Products & Services

Principal Products & Services Starbucks offers a range of exceptional products that customers enjoy in our stores, at home, and on the go. Coffee: More than 30 blends and single‐origin

premium coffees.

Handcrafted Beverages: Fresh‐brewed coffee, hot and iced espresso beverages, Frappuccino® coffee and noncoffee blended beverages, smoothies and Tazo® teas.

Merchandise: Coffee‐ and tea‐brewing equipment, mugs and accessories, packaged goods, music, books and gifts.

Fresh Food: Baked pastries, sandwiches, salads, oatmeal, yogurt parfaits and fruit cups.

Main geographic area of Starbucks:

All over the world, especially, North

America, Latin America, Europe, the

Middle East and the Pacific Rim.

Audit Report

Starbucks independent auditors :

Deloitte & Touche LLP

Auditors state:

The consolidated financial statements of

Starbucks cooperation are in conformity with

accounting principles generally accepted in the

United States of America.

Stock Market Information

Most Recent Stock Price: $63.14

http://finance.yahoo.com/q/bc?s=SBUX&t=1

y&l=on&z=m&q=l&c=

Stock Market Information

Continue… Trading Range

Day's Range: 62.79 - 64.35

52wk Range: 43.04 - 64.93

Dividend per share

---Cash Dividends Declared per share

$0.72

Date of above information

May 31, 2013

BUY/SELL/HOLD

In my opinion, Starbucks is a growing company

and it is worthy buying its stock.

But, I do not think that it is the right time to

buy the stock, since the current stock price is

comparatively higher than previous months and

the stock price starts to drop. I believe that

investors should purchase the stock later.

Income Statement

Fiscal Year Ended Sep 30, 2012 ( in

millions)

Oct 2, 2011 ( in

millions)

Total Net Revenue $ 13,299.5 $ 11,700.4

Less cost of goods sold $ 5,813.3 $ 4,915.5

Gross Profit $ 7486.2 $ 6784.9

Income from operation $ 1,997.4 $ 1,728.5

Net Income $ 2,059.1 $ 1,811.1

The format is most like a single-step format, since it does

not use net sale subtracts cost of goods sold first to get

gross margin ( not presented in the income statement).

Income Statement Continues

Comment:

Since 2011,

Gross Profit: increased by $701,300,000 or by 10.3%

Income from operation: increased by $268,900,000 or by 15.6%

Net Income: increased by $248,000,000 or by 13,7%

Overall, Starbucks Cooperation not only makes profits in the past two years, but also it enjoys growing profitability.

Balance

Sheet

Balance Sheet Comments:

Goodwill---increased by $77,500,000 or 24.1%, which suggests increasingly good reputation.

Total Asset---increased by $858,800,000 or 11.7%, which indicates a growing company

Accrued Liability---increased by $192,900,000 or 20.5%

Retained Earning---increased by $788,800,000 or 18.5%

Non-controlling interests---increased by $3,100,000 or 129.2%, which means it earns a lot from its financing investments.

Statement of Cash Flows

Cash from operation

Cash from investing

Cash from financing

Fiscal Year Ended Net cash change(in millions)

Sep. 30, 2012 $ 1,750.3

Oct. 2, 2011 $ 1,612.4

Fiscal Year Ended Net cash change(in millions)

Sep. 30, 2012 $ (974.0)

Oct.2, 2011 $ (1,019.5)

Fiscal Year Ended Net cash change(in million)

Sep. 30, 2012 $ (745.5)

Oct.2, 2011 $ (608.0)

Fiscal Year Ended Net income before taxes(in

millions)

Sep. 30, 2012 $ 2,059.1

Oct.2, 2011 $ 1,811.1

Year 2012: cash flows operation is less than net income by

$308,800,000

Year 2011: cash flow operation is less than net income by

$198,700,000

I do not think that the company is growing mainly through

investing activities, since in 2012 Starbucks cuts its

expenditure on investing activities.

Primary source of financing : issuance of common stock.

Issuance of common stock $236,600,00 is outstanding in

net cash flow from financing in 2012.

Overall, cash at the end of Sep. 30, 2012 is $1,188,600,000,

Cash at the end of Oct. 2, 2011 is $1,148,100,00

Cash is increased by $40,500,000

Accounting Policies

The significant accounting policies relates to:

• Revenue recognition: Consolidated revenues are presented net of intercompany eliminations for wholly owned subsidiaries and investees controlled by Starbucks and for licensees accounted for under the equity method, based on its percentage ownership. Additionally, consolidated revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates.

Cash All highly liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents are valued using active markets for identical assets. Cash and cash equivalent balances with financial institutions that exceed federally insured limits are maintained on the balance sheet.

Inventories: Inventories are stated at the lower of cost (primarily moving average cost) or market. Inventory reserves are recorded for obsolete and slow-moving inventory and for estimated shrinkage between physical inventory counts. Inventory reserves are based on inventory obsolescence trends, historical experience and application of the specific identification method.

Short-term and Long-term Investments: short-term and long-term investments consist primarily of investment grade debt securities, including some auction rate securities, and investment portfolio, all of which are classified as available-for-sale. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses are recorded, net of tax, as a component of accumulated other comprehensive income. Available-for-sale securities with remaining maturities of less than one year and those identified by management at the time of purchase to be used to fund operations within one year are classified as short term. All other available-for-sale securities, including all of Starbucks auction rate securities, are classified as long term. Unrealized losses are charged against net earnings when a decline

in fair value is determined to be other than temporary. Realized gains and losses are accounted for using the specific identification method. Purchases and sales are recorded on a trade date basis. Trading securities are recorded at fair value with unrealized holding gains and losses included in net earnings.

Property, Plant and Equipment Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation of property, plant and equipment, which includes assets under capital leases, is provided on the straight-line method over estimated useful lives, generally ranging from 2 to 15 years for equipment and 30 to 40 years for buildings. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life, generally 10 years . For leases with renewal periods the original lease term, excluding renewal option periods, is used to determine estimated useful lives. The portion of depreciation expense related to production and distribution facilities is included in cost of sales including occupancy costs on the consolidated statements of earnings. The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. When assets are retired or sold, the asset cost and related accumulated depreciation are eliminated with any remaining gain or loss recognized in net earnings.

• List the topics of the notes to the

financial statements

Description of Business

Principles of Consolidation

Fiscal Year End

Reclassifications

Estimates and Assumptions

Cash and Cash Equivalents

Cash Management

Short-term and Long-term Investments

Fair Value of Financial Instruments

Derivative Instruments

Allowance for Doubtful Accounts

Inventories

Property, Plant and Equipment

Goodwill and Other Intangible Assets

Long-lived Assets

Insurance Reserves

Revenue Recognition

Stored Value Cards

Retail Revenues

Specialty Revenues

Research and Development

Store Preopening Expenses

Operating Leases

Asset Retirement Obligations

Stock-based Compensation

Foreign Currency Translation

Income Taxes

Earnings per Share

Common Stock Share Repurchases

Recent Accounting Pronouncements

Financial Analysis Liquidity Ratios

2011 2012

Workin

g

Capital

$3794900000-

$2075800000

$1,719,100,

000

$4199600000-

$2209800000

$1,989,800,000 Current

asset-current

liability

Curren

t Ratio

$3794900000/

$2075800000

1.83 $4199600000/

$2209800000

1.90 Current asset/

current

liability

Receiva

ble

turnove

r

$11700.4*2/

($302.7+$386.

5)

(in millions)

33.95times $13299.5*2/($

386.5+$485.9)

(in millions)

30.49times Net

sale/average

account

receivable

Averag

e days’

sales

uncolle

cted

365days/33.95 10.75days 365days/30.49 11.97days 365/receivable

turnover

2011 2012

Inventory

Turnover

$4915.5*2/($543

.3+965.8)

(in millions)

6.51 times $5813.3*2/($965.8+

$1241.5)

(in millions)

5.27times Cost of

good

sold/average

inventory

Average

days’

inventory

on hand

365days/6.51 56.07days 365days/5.27 69.26days 365/inventor

y turnover

Operating

cycle

10.75days+56.07

days

66.82days 11.97days+69.26days 81.23days

*2011 averages were found by averaging 20011 and 2010 values from the Starbucks

Corporation’s 2010 annual report.

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsAnnual

Working Capital: increased from 2011 to 2012. It is a large positive number, which indicates that current asset is much more than current liability.

Current Ratio: increased from 2011 to 2012. Current Ratio in both years are greater than 1. An increasing current ratio could signify a increase in a company’s ability to pay off debts in a timely manner.

Receivable Turnover: decreased from 2011 to 2012, reflecting a decreased in the effectiveness of Starbucks’ credit policies, even though account receivable is increased from 2011 to 2012.

Average days’ sales uncollected: increased from 2011 to 2012, reflecting Starbucks has to wait more days on average to receive credit payment for credit sales they have made.

Inventory turnover: decreased from 2011 to 2012. The relative size of Starbucks Corporation’s inventory decreases.

Average days’ inventory on hand: increased form 2011 to 2012. Although Starbucks holds more inventory, it is not able to move inventories in and out more rapidly.

Operating cycle: increased from 2011 to 2012, which means Starbucks take more time to get cash from receivable account and inventory.

Conclusion:

Starbucks liquidity has decreased from 2011 to 2012. However, inventory has increased which is good. This is probably due to the company’s dependence on debt to help finance future growth. If the company is able to be profitable enough to pay off these debts in the long run, Starbucks should be fine. But, decreasing liquidity could cause severe financial problem for a company getting further into debt, So, the Starbucks Corporation should continue with caution.

Financial Analysis Profitability Ratios

$in millions 2011 $in millions 2012

Profit margin $1811.1/$11

700.4

15.48% $2059.1/$13

299.5

15.48% Net

income/reven

ue

Asset

turnover

$11700.4*2/(

6385.9+7360.

4)

1.70times $13299.5*2/(

7360.4+8219.

2)

1.71times Revenue/aver

age total

asset

Return on

assets

$1811.1*2/($

6385.9+$736

0.4)

26.35% $2059.1*2/($

7360.4+$821

9.2)

26.43% Net Income/

average total

asset

Return on

equity

$1811.1*2/($

2703.6+$297

3.1)

63.81% $2059.1*2/($

2973.1+$310

4.7)

67.76% Net

Income/avera

ge total SHE

2011 averages were found by averaging 20011 and 2010 values from the Starbucks

Corporation’s 2010 annual report.

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsAnnual

• Profit margin: remains the same in 2011 and 2012.

• Asset Turnover: increased from 2011 to 2012. The number of asset turnover is greater than 1, which indicates high efficiency in turning assets into sales.

• Return on assets: increased from 2011 to 2012. As a result, the Starbucks Corporation’s overall profitability, or overall earning power has increased in the past two years.

• Return on equity: increased from 2011 to 2012. The profitability stockholders’ investments, or net income resulting from stockholders’ investments, has increased by 3.95%

• Over the past two years, Starbucks has seen an increase in profitability. In addition, return on equity has increased, meaning that Starbucks is generating increasingly more income from stockholders’ investments. With this high overall profitability, Starbucks can pay off the debts that they have generated to fund their rapid growth in the past few years.

Financial Analysis Market Strength

Ratios 2011 2012

Price/earning

s per share

$37,86/$1.62 23.37times $48.66/$1.79 27.18times Market price/

earing per

share

Dividend

yield

$0.56/$37.86 1.479% $0.72/$48.66 1.480% Dividend per

share/

Market price

*Market price was determined by averaging the high and low market prices from

the fourth quarters of each year found in the annual report

• Starbucks Corporation’s P/E ratio: increased from 23.37 times in

2011 to 27.18 times in 2012, which means that investors’

confidence in Starbucks’ future growth is increasing.

• Dividend yield: increased from 2011 to 2012, which means

shareholders’ gain from their investment

Financial Analysis Solvency Ratios

$in millions 2011 $in millions 2012

Debt to

equity

$2973.1/$438

7.3

0.678 $3104.7/$511

4.5

0.607 Total

liability/total

SHE

Payable

turnover

$4915.5*2/($

282.6+$540)

11.95times $5813.3*2/($

540+$398.1)

12.39times Cost of good

sold/ average

account

payable

Average days’

Payable

365days/11.9

5

30.54days 365days/12.3

9

29.46days 365/payable

turnover

Financing gap 66.82days-

30.54days

36.28days 81.23days-

29.46days

51.77days Operating

cycle-average

days’ payable

2011 averages were found by averaging 20011 and 2010 values from the

Starbucks Corporation’s 2010 annual report.

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-reportsAnnual

Debt to Equity: decreased from 2011 to 2012, which means the increase in total liability is relatively small compared to the increase in SHE. Also, debt to equity is less than one, reflecting that share holders’ rather than creditors control Starbucks.

Financial gap: increased greatly from 2011 to 2012, reflecting Starbucks need to borrow money to cover its daily payable. Starbucks is relying on debt to finance its growth. This might cause severe financial crisis, if Starbucks cannot afford the debt.

Industry Situation & Company Plans Coffee industry is quite large today. Coffee is the second most consumed drink after water. Nowadays, coffee shops have already become desirable places for people to meet others. Customers now are more knowledgeable about coffee. They require high quality coffee. There are basically two types of coffee: one is, namely, “basic”, the other is “special” Coffee industry today becomes increasingly competitive due to the increasing number of coffee brands and manufacturers. Facing such competitive industry, Starbucks starts Accelerated Global Growth Plan which emphasizes on innovation, operation leverage and global brand relevancy. (see link:

http://news.starbucks.com/artice_display.cfm?article_id=733) In addition, in order to stay competitive in the coffee market, Starbucks introduces caloric menu board labeling nationwide. This strategy reflects Starbucks’ commitment to customers’ wellbeing.(see link: http://news.starbucks.com/article_display.cfm?article_id=791). Moreover, according to the 2012 annual report, Starbucks adopt Stock Option Plans. Stock options to purchase Starbucks common stock are granted at the fair market value of the stock on the date of grant.

Executive Summary

Starbucks Coffee Company enjoys good reputation in coffee market. The company should continue to maintain its outstanding reputation. Due to increasing competiveness in coffee industry, Starbucks must maintain its high quality as priority. According to Accelerated Global Growth Plan, Starbucks plan to expand its branches around the world in short time. Because of the rapid expansion, Starbucks must keep high quality equivalently throughout the world. Provided that the standard of quality were to drop, customers would be unlikely to purchase coffee of Starbucks, resulting significant loss of market share.