This Note was prepared by Kathleen T. Hevert, Associate Professor of Finance at Babson College, as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. It is not intended to serve as an endorsement, sources of primary data or illustration of effective or ineffective management. Copyright © 2013 Babson College and licensed for publication to Harvard Business Publishing, Inc. All rights reserved. No part of this publication can be reproduced, stored or transmitted in any form or by any means without prior written permission of Babson College. BAB036N J ULY 2013 Starbucks Corporation: Financial Analysis of a Business Strategy This note introduces and illustrates common ratios used in financial statement analysis. These measures include three types: (1) profitability ratios measure the margin by which revenues cover various categories of costs; (2) asset management ratios address the efficiency with which the asset base is used to generate sales; and (3) financial leverage ratios measure usage of debt as a financing mechanism. We also discuss DuPont analysis of return on equity to illustrate how profitability, asset utilization, and financial leverage come together to measure ability to generate returns to shareholders. This note uses financial results for fiscal 2010 through 2012 for Starbucks Corporation to illustrate basic financial analysis, including common size statements and ratio calculation, interpretation, and linkages to business strategy. We do not draw definitive conclusions about whether Starbucks is effectively managed. Instead, we illustrate how Starbucks’ operating strategy is reflected in its financial results, in order to demonstrate that financial results tell an intuitive story about a firm’s business model and operating strategy. This note assumes a working knowledge of key financial statements: income statement and balance sheet. Note the following regarding language: most financial metrics, whether reported in financial statements or computed by analysts, have multiple equivalent titles. For example, net income is referred to interchangeably as net profit or profit after tax, while shareholders’ equity is k nown equivalently as stockholders’ equity or net worth. Therefore, analysis of financial results may require consultation of a financial dictionary, either in print or online. BACKGROUND: STARBUCKS CORPORATION 1 Starbucks is a roaster, marketer and retailer of specialty coffee. Its mission is “to inspire and nurture the human spirit —one person, one cup and one neighborhood at a time.” 2 Through company-operated retail stores, the company purchases, roasts, and sells high-quality packaged coffees — along with freshly brewed coffees, teas, and other beverages, a variety of fresh food 1 Unless otherwise specified, all information in this section is drawn from Starbucks Corporation Annual Reports for 2011 and 2012.