Integrative Case 1.1 introduced the industry economics of coffee shops and the business strategy 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 presents 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 receivable 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 business 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 revenues 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?