An Analysis Of Starbucks Corporation: Impact Of Covid-19, Dividend Policy, And Sources Of Finance

Section A

Starbucks Corporation is a roaster, marketer, and retailer of ground coffee with operations in more than 80 nations around all over the world. Starbucks was founded in the year 1971 and is headquarters is situated in Washington, United States. It has more than 30 thousand stores that are licensed and operated by the company (Williams and Dobelman 2017). It conducts its business through three parts that are Americas, International, and Channel Development.

The COVID-19 pandemic is had a significant impact on companies all over the world, including Starbucks Coffee. The pandemic has had an entirely unrivalled influence on the contemporary globalized world. Starbucks has overcome a challenging trading year to outperform its pre-pandemic revenues. The leading coffee chain a 23.6% rise in full-year earnings to $29.1B, a 9.8% percent increase over the $26.5B generated in 2019. Revenues in the fourth quarter of 2021 were $8.1B, a 31.3 percent increase over the same period in 2020. Fourth-quarter revenues in Starbucks’ flagship US market increased 37% to $5.3B especially in comparison to the same timeframe in 2020, expressing the positive influence of the Covid-19 vaccine roll-out and a relaxation of trading limitation (World Coffee Portal 2021). Nevertheless, performance of Starbucks tin China, the company’s second leading market, was hindered by Covid-19 constraints implemented throughout the nation toward the end of the quarter. Like-for-like store sales fell by 7%, owing to a 5% decrease in average ticket and a 2% drop in sales.

Over 8,000 coffee shops of Starbucks in the US were closed for racial bias training. Starbucks closed coffee stores across the United States in the mid-afternoon while putting 175,000 individuals thru a cleverly engineered training programme on acknowledging racial bias and the background of public places in the United States (Gabbatt, A., 2018). Regrettably, as a result of the news, investors have sold their stocks. The share price was worth $59.83 at the time of disclosure on April 17th. Since then, the share value has fallen, reaching as low as $56.00 (Cress 2018).

Financial Management is concerned with three main financial decisions which a finance manager has to engage for ensuring long term value creation. Among these three functions, dividend related decisions are an integral consideration for the finance manager as it is directly related to the value provision to the shareholders. Dividend is a proportion of the after-tax net income which is not retained by the company and is ‘returned’ back to its shareholders for their investments in the equity of the company. It may be paid in or also in the form of stock options (Ehrhardt and Brigham 2016). As a result, dividend policy is best defined as a financial decision or a financial policy which guides the company in structuring their dividend payouts each financial year to its shareholders and deciding upon the frequency of such distribution of returns (Frino, Hill and Chen 2015).

There are two prominent dividend theories which apply in the case of Starbucks. These have been briefly discussed as follows:

i. Dividend Relevance Theory: The fundamentals of the dividend relevance theory have been put forward by Walter and Gordon. As per this theory, the shareholders of any company will prefer returns in the form of dividend income as opposed to returns in the form of capital appreciation income. This is because of uncertainty which concerns capital gains (Graham, Adam and Gunasingham 2020). As a result, their expectations and appetite for dividend is on the higher end of the spectrum. This holds true in the case of Starbucks considering the present state of volatility of the stock market as a result of the Covid19 pandemic.

Development One: Covid 19

ii. Dividend Signalling Theory: According to this dividend related theory, whenever any company announces any increase in the dividend payouts, this is indicative of a positive financial outlook for the business. This will ultimately translate to the value of a stock of share whose prices will increase after any such announcement (Hillier 2019). This holds true in the case of Starbucks as stock prices are reactive to such dividend related declarations by the company

Starbucks have resorted to paying dividend consistently over the last three years through 2018-2020. On identifying the patter of dividend payments undertaken by Starbucks, it can be analysed that the company’s payouts are consistent with the progressive dividend policy. According to the progressive dividend policy, the payouts of the business are linked to the earnings of the business. This means that the dividend payouts will increase with an increase in the company’s earnings. However, unlike a stable dividend policy, this dividend policy will result in progressive payouts growth even in the case of a decline in earnings (De Matos 2018). This means that if the earnings of the company are compromised, the company will still attempt to increase their dividend payouts. As seen in the case of Starbucks, irrespective of a decline in the earnings per share, the company was able to increase their dividend payout ratio. 

The company was able to make use of their liquidity for paying dividend to the shareholders irrespective of a decline in profitability. Furthermore, the company has no intent to reduce quarterly dividend payouts as a outcome of the Covid-19 pandemic. However, the share repurchase programme has been suspended temporarily.

There are several reasons why any business (start-up or mature) requires access to finance. It may be for a wide variety of reasons which include the likes of capital investments, dividend payments, undertaking growth & expansion or even in the ordinary course of operations. Sources of finance can be understood in this regard as the different sources of financial support which any organisation has access to that can help in meeting its requirement (Brealey et al. 2018). There are two prominent sources of finance which forms the total capital structure of any organisation. These are equity sources of finance and debt sources of finance.

As with the case of Starbucks, the company also happens to rely upon debt and equity for its funding requirements. Starbucks have a total shareholder’s funds worth $ (7,799.4) million and $ (6,231.0) million for the financial years 2020 and 2019 respectively. The total shareholder’s equity comprises of retained deficits, additional paid-in-capital, common stock and other accumulated comprehensive losses. On the debt side of the spectrum, as with any company, Starbucks make use of both, short term current debts as well as long term non-current debts. The value of total current liabilities for the company is worth $7,346.8 million and $6,168.7 million for the financial year 2020 and 2019 respectively. This comprises of accounts payable, accruals, short term debts and current portion of long-term debts. The value of total long-term debts are $14,659.6 million and $11,167.0 million for 2020 and 2019 respectively. The company also has operating lease obligations, revenue received in advance and other long-term liabilities.

Development Two: Closing of 2000 Stores

The component break-down of debt and equity element of the company have been attached as a screen shot presented as follows:

Based on the above financial particulars, the gearing ratio of Starbucks has been calculated for the years 2018-2020. This has been presented as follows:

Gearing ratio is a measure of long-term financial solvency which helps to gauge the preference which a company has for debt sources of finance forming a part of their total capital structure (Vernimmen, Quiry and Fur 2022). As observed from the calculated figures, the gearing ratio of the company is increasing year on year from 88.55% in 2018 to 226.24% in 2019 and a marginal decline at 213.69%. The company is highly geared which is because of the significant reliance it places upon debt sources of finance as the value of long-term debt can be seen to increase with every passing year while the value of shareholder’s equity remaining negative over the last two years.

Companies are often tempted to turn to debt because these are cheaper when compared to equity in terms of costs. Further, companies are entitled to tax allowance on interest expense. However, a highly geared company will result in an increase in exposure to financial leverage which in turn will result in a threat of financial risk exposure. This is confirmed by the Net income capital structure theory. The current proportion of debt and equity sources of finance results in a capital structure which is far from optimal. A higher debt dependence will result in a higher interest expense as well which is confirmed by the income statement where the interest expense has increased year on year from $170.3 million to $331.0 million to $437.0 million through 20218-2020.

The net profit margin is utilized to indicate how much income is generated by a company based on total sales. It calculates the net profit a firm generates for every dollar of revenue earned. It assists investors to access if a company’s management is earning sufficient income from its sales and if operating and overhead costs are being contained (Rashid 2018).

It can be seen that the net profit margin of Starbucks of the year 2020 and 2019 is measured at 3.95% and 13.58% respectively. Hence it could be said that Starbucks had suffered from net loss in 2020. In other words, it means that Starbucks is generating less money for every dollar earned. The reason behind the decline in net profit margin is decline of sales. Due to Covid-19, Starbucks suffered a hug loss in its sale.

Return on equity (ROE) is measured by dividing a net income by its shareholders’ equity. ROE is used to calculate a firm’s profitability and how proficiently it produces income (Restianti and Agustina 2018).

The Starbucks ROE for the 2020 and 2019 is measured at -11.9 % and -57.76% respectively. It is clearly evident that ROE is in negative and hence the business suffered from net loss. The reason behind the negative ROE is recession and economic downturn.

Section B

The Current Ratio assesses the firms’ capability to fulfil its short term liabilities which are due in a year. It denotes a company’s financial health and how it can optimise the cash flow of its current assets to resolve payables and debt (Arkan 2016).

On the basis of the calculation, it is seen that current ratio has increased from 0.92 to 1.06 times. It implies that Starbucks is more competent of meeting its duties since its short term asset value is greater than the value of its short-term liabilities. The reason behind this could be cutting certain costs, managing payables and receivables, utilizing long term funds, or paying off liabilities.

The quick ratio assesses a firm’s capability to settle its current liabilities without selling or obtaining inventory or additional funding. The quick ratio is a more conventional indicator than the current ratio that regards all current assets to be protection for current liabilities (ažák and Stavárek 2017)

On evaluating quick ratio, it has seen that the quick ratio was less than one since the last two financial years, indicating that Starbucks does not have any liquid assets to clear its current debts and should be treated with care.

The rate at which inventory stock is purchased, utilised, and modified is referred to as inventory turnover. This ratio is determined by dividing the cost of goods by the inventory (Nadar and Wadhwa 2019).

The inventory turnover ratio is a excellent indicator of how well a company converts its inventory into revenues. It is observed that the inventory turnover ratio has decreased from 5.85 times to 4.96 times. However, low inventory implies that Starbucks has poor sales and presumably surplus inventory.

The asset turnover ratio assesses the effectiveness with which a business’s assets generate sales revenue (Alarussi 2021). It computes an annualised percentage by comparing the dollar amount of sales to total assets. 

The asset turnover ration of the Starbucks has decreased to 0.8 time in 2021 from 1.38 times in 2019. Thus it indicates that Starbucks is not utilizing its assets properly and might have some internal issues.

EPS is a broadly used criterion for assessing company growth because it shows how much revenue a business makes for every share of stock it owns (Laitinen 2018).

It can be seen that in two years, the earning per share has drastically decreased which signifies the poor indication about the health if the Starbucks. Moreover it also implies that Starbucks gives less return to its stakeholders

The price-to-earnings ratio (P/E ratio) is a valuation ratio that compares a current share price to its EPS. The P/E ratio is further known as the earnings multiple or the price multiple (Liang, et al 2016)

It has been observed that the P/E ratio has been increased drastically from 29.64 in 2019 to 134.14 in 2020.The reason behind this is that the investors are inclined to spend an elevated stock value because of the of future growth expectations from Starbucks.

Conclusion

It can be conclude from the preceding discussion that financial ratio analysis was utilized to examine the business’s overall financial performance. Financial ratios, on the other hand, provide accounting information with about a company’s performance. It also helps to determine the company’s liquidity and long-term solvency.

References 

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Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A case study in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia, (79), pp.13-26.

Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2018. Principles of corporate finance, 12/e (Vol. 12). McGraw-Hill Education.

Cress, S., 2018. What’s The Impact Of Starbucks Closing 8,000 Stores?. [online] Forbes. Available at: <https://www.forbes.com/sites/stevencress/2018/05/29/whats-the-impact-of-starbucks-closing-8000-stores/?sh=3e27b8b2696a> [Accessed 30 March 2022].

De Matos, J.A., 2018. Theoretical foundations of corporate finance. Princeton University Press.

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Frino, A., Hill, A. and Chen, Z., 2015. Introduction to corporate finance. Pearson Higher Education AU.

Gabbatt, A., 2018. Starbucks closes more than 8,000 US cafes for racial bias training. [online] the Guardian. Available at: <https://www.theguardian.com/business/2018/may/29/starbucks-coffee-shops-racial-bias-training> [Accessed 30 March 2022].

Graham, J., Adam, C. and Gunasingham, B., 2020. Corporate finance. Cengage AU.

Hillier, D., 2019. EBOOK: Corporate Finance: European Edition. McGraw Hill.

Laitinen, E.K., 2018. Financial reporting: Long-term change of financial ratios.

Liang, D., Lu, C.C., Tsai, C.F. and Shih, G.A., 2016. Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research, 252(2), pp.561-572.

Nadar, D.S. and Wadhwa, B., 2019. Theoretical review of the role of financial ratios. Available at SSRN 3472673.

Pražák, T. and Stavárek, D., 2017. The effect of financial ratios on the stock price development. Interdiscip. Econ. Bus. Res, 43, p.3.

Rashid, C.A., 2018. Efficiency of financial ratios analysis for evaluating companies’ liquidity. International Journal of Social Sciences & Educational Studies, 4(4), p.110.

Restianti, T. and Agustina, L., 2018. The effect of financial ratios on financial distress conditions in sub industrial sector company. Accounting Analysis Journal, 7(1), pp.25-33.

Vernimmen, P., Quiry, P. and Le Fur, Y., 2022. Corporate finance: theory and practice. John Wiley & Sons.

World Coffee Portal, 2021. Starbucks exceeds pre-pandemic earnings after ‘record’ fourth quarter. [online] World Coffee Portal. Available at: <https://www.worldcoffeeportal.com/Latest/News/2021/November/Starbucks-exceeds-pre-pandemic-earnings-after-reco> [Accessed 30 March 2022].

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