Reference no: EM13901990

Part A

Integrative Case 1.1 introduced the industry economics of coffee shops and the business strat- egy of Starbucks to compete in this industry. Exhibit 1.26 presents balance sheets for Starbucks for the years ending 2005-2008. Exhibit 1.27 presents its income statements and Exhibit 1.28 presents the statement of cash flows for fiscals 2005, 2006, 2007, and 2008. Exhibit 1.29 pres- ents common-size balance sheets and Exhibit 1.30 presents common-size income statements for Starbucks. Before beginning preparation of Integrative Case 4.1, we recommend that you review Integrative Case 1.1 in Chapter 1.

Part A of Integrative Case 4.1 analyzes changes in the profitability of Starbucks for fiscal 2006-2008.

Required:

a. Exhibit 4.44 presents profitability ratios for Starbucks for fiscals 2006 and 2007. Using the financial statement data in Exhibits 1.26 and 1.27, compute the values of these ratios for fiscal 2008. The income tax rate is 35 percent. For accounts receiv- able turnover, use only specialty revenues for the numerator, because the accounts receivable are primarily related to licensing and food service operations, not the retail operations. Use cost of sales, including occupancy costs, for the numerator of the inventory turnover because Starbucks does not disclose separately the cost of products sold (the appropriate numerator) and occupancy costs.

b. What are the most important reasons Starbucks' ROA decreased during the three- year period? Analyze the financial ratios to the maximum depth possible with the information given. Using the nomenclature from the schematic in Exhibit 4.20, Exhibit 4.45 provides information for analyzing profitability at Level 1, Level 2, and Level 3. Exhibit 4.45 presents additional information for Starbucks at a busi- ness segment level to permit analysis at Level 4. Corporate-level expenses not allocated to domestic or international operations, which include depreciation, amortization, general, and administrative expenses, as a percentage of total reve- nues were 3.3 percent for fiscal 2008, 3.6 percent for fiscal 2007, and 4.3 percent for fiscal 2006.

c. What are the most important reasons Starbucks' ROCE decreased during the three- year period?

Part B

Part B of Integrative Case 4.1 compares the profitability of Starbucks with Panera Bread Company. Although Starbucks and Panera Bread Company are not direct competitors in terms of the principal food products offered, they compete in the sense of offering a relaxed café experience. Whereas the products of Starbucks center on coffee and related beverages, Panera Bread Company emphasizes freshly baked bread and pastries. Panera Bread Company also sells sandwiches, soups, and similar lunch and light dinner products that build on their bread offerings, as well as coffee and other beverages. The average size of a Panera Bread Company retail outlet is typically larger than that of Starbucks. Both Starbucks and Panera Bread Company own some of their retail stores and franchise or license rights to use their names and products to other parties that own and operate other retail stores. Panera Bread Company prepares fresh dough daily in various regional facilities to use in company-owned stores and to sell to franchisees. Unlike Starbucks, it has not expanded beyond the United States.

Exhibit 4.46 (see page 333) presents profitability ratios for Panera Bread Company for 2006-2008, and Exhibit 4.47 (see pages 333-334) presents segment profitability and other data. The format of Exhibit 4.46 is similar to that of Exhibit 4.44. However, due to less detailed disclosures by Panera, Exhibit 4.47 does not contain specific cost structures for Panera's operating segments, similar to what was available from Starbucks and presented in Exhibit 4.45. The proportions of general and administrative expenses not allocated to divi- sions for Panera Bread Company are similar to the corresponding percentages for Starbucks (suggesting they are not material enough to specifically factor into the analysis).

Required:

a. Panera's ROA has typically been below that of Starbucks prior to 2008. What are the likely reasons for the relative levels of ROA between Panera and Starbucks? Analyze the data to the maximum depth permitted by the information given and speculate on economic explanations for what the analysis indicates.

b. Panera's ROCE also has typically been below that of Starbucks, but by a large mar- gin. Why?

a Revenues represent sales from company-operated retail stores.

b Revenues represent fees and other revenues from licensees.

c Comparable stores represent stores open at least two full years.

Text Book: Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective By James Wahlen, Stephen Baginski, Mark Bradshaw.