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Starbucks v. Dunkin Donuts: A Financial Review
Transcript of Starbucks v. Dunkin Donuts: A Financial Review
Analysis Targets Starbucks Dunkin' Donuts Sales growth: 12% Gross Margin: 57.9% Operating Working Capital as a Percentage of Sales: 14.7% Estimate was only 10% Sales growth: 4.8% Operating Working Capital as a Percentage of Sales: 14.3% Gross Margin: 71.8% Estimate was only 3.4% Starbucks Products and Services Audit Business Model Beverages DIY Coffee Foodstuffs hot iced frozen packaged coffee
Verismo bakery items
packaged meals The audit committee consists of 3 members
The audit committee met 7 times during 2011
Deloitte & Touche LLP was the external auditing firm Company owned and licensed stores Revenues Company operated stores
Consumer packaged goods
Licensing arrangements Dunkin Donuts Products and Services Beverages DIY Coffee Foodstuffs hot
cold Packaged Coffee
K-Cups breakfast sandwiches
bakery sandwiches Business Model 100 % franchised
Associated royalties and fees
Rental income from franchise properties
Sale of ice cream to franchisees
Fees for licensing of Dunkin Donuts products Revenues Audit The Audit Committee met 8 times during 2011
KPMG was the external auditing firm
The audit committee consists of 3 members so what does that mean? Increase in %change receivables and revenue Cash Flow Problems Decrease in % of accounts receivable noncollectable It was 1.1% in 2010 Percentage change in net receivables: 27.7% Percentage change in revenues: 9.2% Percentage of Accounts Receivable uncollectable: .09% Under-reporting Percentage change in net receivables: 89.3% Percentage change in revenues: 10.7% Percentage of receivables deemed noncollectable: 1.1% It was 4.1% in 2010 so what does that mean? Large increase in Accounts Receivable Decrease in Accounts Uncollectable Under-reporting to preserve net income Inventory lower of moving average cost or market price Starbucks Increased by $422,500,000 from 2010 to 2011 That's a 78% increase Includes unroasted coffee, roasted coffee, tea, other merchandise held for sale, packaging, and other supplies Sales grew 1% from 2010 to 2011, but inventory
increased a lot more.
Inventory growth and sales growth need to be balanced Dunkin' Donuts Dunkin’ Donuts has no inventory Total Revenues increased $51,063,000 Revenue Royalty income
Franchise fees That's 8% Domestic Sales Grew by 9% Sales growth was slightly higher than revenue growth Company’s growth rates can determine it's future profitability and growth. Starbucks Dunkin' Donuts PP&E Net book value of $2,416.5 (in millions) at the end of 2010 and $2,355 (in millions) at the end of 2011 Starbucks uses straight-line depreciation Straight line is the simplest depreciation method it has positive effects on net income Includes land, buildings, leasehold improvements, store equipment, roasting equipment, furniture, and fixtures
Useful lives range from 2-15 years for equipment and around 10 years for leasehold improvements
Useful lives for buildings range from 30-40 years At the end of 2010 equaled $193,273,000
At the end of 2011 equaled $185,360,000 straight-line method of depreciation the increased net income and earnings per share are attractive to investors the company can easily estimate the useful lives of their assets useful lives:
Buildings- 20-35 years
Leasehold improvements- 5-20 years
Store, Production, and other Equipment- 3-10 years
It is important to compare useful lives because management makes these estimations and can use them to manipulate current and future earnings
The straight-line method produces a higher net income, so the longer an asset depreciates for, the longer the net income will appear higher. The useful lives for Dunkin’ Donuts and Starbucks’ Property, Plant, and Equipment are very similar Intangible Assets Dunkin' Donuts Starbucks 2011 2010 Impairments 2010 : 7,075,000 2011 : 2,060,000 Impairments were charged as a whole.
DD did not indicate which assets were impaired 2010 2011 Impairments 2010 : 53,000,000 2011 : 0 There was also no indication of which specific assets were impaired. The impairments relate primarily to the U.S. and International store closures that occurred as part of Starbucks’ store portfolio rationalization which began in 2008. The $0 in 2011 is offset by a large increase in operating expenses due to the closure of 475 Seattle’s Best Coffee locations associated with the Borders Bookstores bankruptcy in April 2011. Statement of Cash Flows Starbucks both use indirect method to report cash flows from operating activities The indirect method starts with net income and converts it to net cash flow from operating activities. It adjusts net income for items that affected reported net income but did not affect cash.
$1,704,900,000 net cash op
- 948,300,000 net income
$756,600,000 difference $1,612,400,000 net cash op
- 1,248,000,000 net income
$364,400,000 difference 2010 2011 Cash Provided by Operating Activities compared to Net income Cash Dividends Paid 2011 $171,000,000 div paid
$948,300,000 net income
= 18.03% of net income 2010 $389,500,000 div paid
$1,248,000,000 net income
= 31.21% of net income dunkin' donuts $229,004,000 net cash op
- 26,861,000 net income
$202,143,000 difference 2010 $162,703,000 net cash op
- 34,442,000 net income
$128,261,000 difference 2011 Cash provided by operating activities compared to net income Cash Dividends Paid
$500,002,000 cash dividends paid
$26,861,000 net income
= 1861% of net income 2010 2011 currently not paying cash dividends So What's the Big Difference? Dunkin’
2010 - $57,826,000
2011 - $ 52,522,000 depreciation & amortization Starbucks
2010 - $540,800,000
2011 - $ 550,000,000 Losses on debt extinguishment and refinancing transactions 2010 - $61,955,000
2011 - $34,222,000 Dunkin' Donuts Dunkin' Donuts Stock-based compensation Starbucks 2010 - $113,600,000
2011 - $145,200,000 Starbucks Strong Buy Room for growth Strong Buy steady revenue increase
exceeds targets Continued increase in revenue Casey Harding, Theresa Roman, Pam Grosner, Jaclyn Englehardt