Leslie Garren
Financial Analysis Project
Acct 210
April 30, 2009
Contents
Company Profiles
Data & Meaning Report
Comparison Report
Appendix
SBUX VS. PNRA
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Company Profiles
Starbucks Corporation was formed in 1985 and today is the world’s leading roaster and retailer of
specialty coffee. Starbucks (together with its subsidiaries, “Starbucks” or the “Company”) purchases and
roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style
espresso beverages, cold blended beverages, a variety of complementary food items, a selection of premium
teas, and coffee-related accessories and equipment, primarily through Company-operated retail stores.
Starbucks also sells coffee and tea products and licenses its trademark through other channels such as
licensed retail stores and, through certain of its equity investees and licensees, Starbucks produces and sells a
variety of ready-to-drink beverages. All channels outside the Company-operated retail stores are collectively
known as specialty operations.
The Company’s objective is to establish Starbucks as one of the most recognized and respected
brands in the world. To achieve this goal, the Company plans to continue disciplined expansion of its retail
operations, to grow its specialty operations and to selectively pursue other opportunities by introducing new
products and developing new channels of distribution.
As of December 30, 2008, Panera operated, directly and through franchise agreements with 39
franchisee groups, 1,252 bakery-cafes (527 Company-owned and 725 franchise-operated bakery-cafes).
During fiscal 2008, Panera opened 91 bakery-cafes system-wide (30 Company-owned and 61 franchiseoperated bakery-cafes) and closed six bakery-cafes system-wide (four Company-owned and two franchiseoperated bakery-cafes). Panera bakery-cafes are principally located in suburban, strip mall, and regional mall
locations and currently operate in 38 states and in Ontario, Canada. With its identity rooted in handcrafted,
fresh-baked, artisan bread, Panera is committed to providing great tasting, quality food that people can trust.
Highlighted by antibiotic free chicken, whole grain bread, select organic and all-natural ingredients and a
menu with no added trans fat, Panera’s bakery-cafe selection provides flavorful, wholesome offerings.
Panera’s menu includes a wide variety of year-round favorites, complemented by new items introduced
seasonally with the goal of creating new standards in everyday food choices. In neighborhoods across this
country and in Ontario, Canada, guests enjoy Panera’s warm and welcoming environment featuring
comfortable gathering areas, relaxing decor, and free internet access provided through a managed WiFi
network. At the close of each day, Panera bakery-cafes donate bread and baked goods to community
organizations in need. On February 1, 2007, we purchased 51 percent of the outstanding capital stock of
Paradise, which at that time operated 22 company-owned bakery-cafes and one commissary and 22
franchise-operated bakery-cafes and one commissary. We have the right to purchase the remaining
49 percent of the outstanding capital stock of Paradise after January 1, 2009 at a contractually determined
value. If we do not exercise our right to purchase the remaining 49 percent of the outstanding capital stock of
Paradise by June 30, 2009, the remaining Paradise owners have the right to purchase our 51 percent
ownership interest in Paradise after June 30, 2009 at a contractually determined value. Paradise owns and
franchises bakery-cafes which feature freshly baked products, such as cookies, muffins and croissants, along
with gourmet and specialty coffees, as well as sandwiches, soups, salads, beverages and other items. As of
December 30, 2008, Paradise operated, directly and through franchise agreements with 10 franchisee groups,
73 bakery-cafes (35 company-owned and 38 franchise-operated bakery-cafes). Paradise bakery-cafes are
principally located in regional malls and life style centers, free standing street locations, downtown business
districts, and office buildings, and currently operate in 10 states that are principally in different markets than
Panera bakery-cafes. During fiscal 2008, Paradise opened 11 new bakery-cafes system-wide (five companyowned and six franchise-operated bakery-cafes) and closed one company-owned bakery-cafe.
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Appendix
Table 1. STARBUCKS
(SBUX) FINANCE STATISTICS
Calculation
Data Formula
Stock Market Price (14.17) ÷ EPS (0.43)
P/E Ratio
33
Current P/E (4/16)
48
Debt to Equity Ratio
0.33
Current Ratio
0.9
Quick Ratio
0.4
EPS
0.43
Short Term Debt (290,800) + Long Term Debt (549,500)
÷
Stockholder Equity (2,584,600,000)
Current Assets (1,693,900) ÷ Current Liabilities (1,953,000)
Cash (356,800) + Marketable Securities (38,700) + Receivables
(332,000)
÷
Current Liabilities (1,953,000)
Net Earnings (315.5 million ) – Preferred Dividends (0)
÷
Avg. # of Shares (741.7 million)
Table 2. PANERA
BREAD CO. (PNRA) FINANCE STATISTICS
Calculation
Data Formula
Stock Market Price (50.22) ÷ EPS (2.22)
P/E Ratio
23
Current P/E (4/16)
26
Debt to Equity Ratio
0.35
Current Ratio
1.2
Quick Ratio
0.9
EPS
2.22
Short Term Debt (114,014)
(4,036 [Accts. Payable], 109,978[Accrued Expenses]) +
Long Term Debt 61,217
(39,780 [deferred rent]; 21,437 [Other])
÷
Stockholder Equity (495,162)
Current Assets (138,413) ÷ Current Liabilities (114,014)
Cash (74,710) + Marketable Securities (2,400) + Receivables
(25,142)
÷
Current Liabilities (114,014)
Net Earnings (67,436,000) – Preferred Dividends (0)
÷
Avg. # of Shares (30,422,000)
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Data and Meaning Report
Data for companies’ price /earnings ratio, debt-to-equity ratio, current ratio, quick ratio and
EPS were gathered from the annual reports of Panera and Starbucks. The calculations of these
statistics are on Table1 for Starbucks and Table 2 for Panera in the appendix. Meanings of these
statistics are discussed below.
Price/Earnings Ratio
A price/earnings ratio is a valuation of the current market price per share to the earnings
per share. Theoretically, the price/earnings ratio tells us how much investors are willing to pay per
dollar of earnings. However, since stock prices are a reflection of what the market believes the
stock will be worth in the future, the P/E Ratio is also an optimistic reflection of the company’s
future growth. A high price/earnings ratio usually indicates that investors are predicting some
good returns in the future. However, price/earnings itself don’t tell us the whole story. It’s
important to consider industry averages and historic ratios when using price/earnings ratio. A new
technology company will have a much higher P/E than a new restaurant business. In Panera’s case,
investors are willing to pay $23 for every $1 the company earns. This is calculated on Table 2 using
Panera’s stock price on year end date divided by the EPS in 2008. Starbucks had a P/E ratio of 33
for the fiscal year. This ratio is rising quickly throughout 2009 with a current P/E ratio of 50.
Starbucks will have to live up to the higher ratio by substantially increasing its earnings; otherwise,
shareholders will not see the benefit of a higher stock price with constant or decreasing returns.
Consequently, the overpriced stock will decrease it’s per share price, also decreasing the amount of
additional paid-in capital received per share.
Debt-to-Equity Ratio
Debt-to-Equity ratio indicates the proportion of debt and equity that a company is using to
finance its assets. It was calculated on Table 1 & 2 by adding short-term and long-term debt, then
dividing this number by total stockholder’s equity. A high debt-to-equity ratio indicates that a
company is using debt aggressively to finance its growth. Whether or not the debt will become too
much for the company to handle, or if the debt will pay off by providing growth of the business is
the risk involved with a high debt-to-equity ratio. Panera had a debt-to-equity ratio of 0.35 as
calculated on Table 2. Starbucks had a debt-to-equity ratio of 0.33 as calculated on Table 1. This
means that for every one dollar of capital that stockholders provided Panera, creditors provided
$0.35. For Starbucks, creditors provided $0.33 for every dollar provided from stockholders. This
helps us determine the degree to which Panera and Starbucks rely on outsiders for funds. It is up to
the financial user to compare industry trends and company history to judge whether or not this
ratio is favorable for the company. Panera and Starbucks’ similar ratios indicate that stockholders
are the primary source of funds, indicating no future issues with overwhelming debt.
Current and Quick Ratio
The current ratio for Panera was 1.2 while Starbucks’ current ratio was 0.9. This simple
calculation on Table 1 and 2 was found by dividing total current assets by total current liabilities.
The current ratio is a measure of how liquid the company is. This means that at the end of fiscal
year 2008, Panera had $1.20 of current assets for every $1 of current liability. Starbucks had $0.90
of current assets for every $1 of liability. Panera would easily be able to pay all liabilities if they
came due at one point. Starbucks, however, would be in trouble if they needed to pay all liabilities
because they have a current ratio less than one. Albeit short just ten cents per dollar, when
multiplied by every $114 billion of Starbucks’ liabilities, this adds up to be over $1,140,000 that
Starbucks wouldn’t be able to cover.
The quick ratio, or acid-test, is a stricter way to reflect liquidity because it leaves inventory
and prepaid assets out of the current assets portion of the ratio. This eliminates the “composition
of assets” problem. In other words, the quick ratio only calculates current cash equivalents into
being able to pay for liabilities. As seen in Tables 1 and 2, Panera had a quick ratio of 0.9 and
Starbucks had a quick ratio of 0.4. Usually, companies with quick ratios less than one would be
approached with caution since they do not have enough quick cash to pay for liabilities. However,
in the restaurant industry, large amounts of inventory are turned into cash on a daily basis.
Inventory can be turned in a day in some restaurants. Therefore, eliminating inventory from the
quick ratio is a very harsh standard when applied to a food business. It’s important to keep the
business type and historic averages in mind when analyzing quick ratios. Regardless of the food
industry acceptations, Starbucks is in deep waters with its meager 40 cents for every dollar of
liabilities.
Earnings per Share
Earnings per share is the portion of profit allocated to each common stockholder’s share. It
is an important number that potential investors use to determine the profitability of the company.
The EPS rate allows stockholders to know what their share of profits is. It also allows investors to
relate earnings to what he or she paid for the stock, or what the current stock market price is.
Earnings per share for Panera in 2008 was $2.20 where as earnings per share for Starbucks was
$0.43. An important factor to examine when using earnings per share is how much capital was
used to gain those earnings. If two companies have similar earnings per share, the company that
produced those earnings with less financial backing would be the more profitable company.
Starbucks is facing a time of decreased earnings and therefore lower earnings per share. After the
first quarter of 2009, Starbucks’ earnings per share had dropped to 0.09.
_____________________________________________________________________________
Comparison Report
When comparing the financial statistics of two companies, it is important to take all
financial operations into consideration. There isn’t a magic number that can accurately be used to
rank companies. In this comparison between Starbucks and Panera, I compared each statistic in
Tables 1 and 2 against the companies’ historic averages and special eatery industry averages.
Finally, I took all of these comparisons into consideration and decided which company was in better
overall financial health.
The first statistic I compared was the price/earnings ratio. To avoid a meaningless
comparison, I considered historic P/E ratios and industry averages. In the special eateries and
restaurant industries, a vast spectrum of P/E ratios exist. The average for the industry is 22.3,
although extremes on the spectrum lead to a somewhat high average. Over the past 5 years,
Panera’s average P/E Ratio was 29.2. Estimated P/E ratio for the next twelve months indicates a
P/E ratio of 21. Starbucks had a higher-than-normal P/E Ratio of 33, which increased dramatically
over the past six months and is currently at 50. The average P/E ratio for Starbucks over the past
five years is 40. Starbucks’ high price/earnings ratio indicates that it is a riskier investment than
Panera since investors are signifying high expectation for Starbuck’s future. However, SBUX annual
report estimates a low profit in fiscal year 2009.
“As a retailer that is dependent upon consumer discretionary spending, the Company expects to face
an extremely challenging fiscal 2009 because of these economic conditions. Accordingly, Starbucks expects to
report negative comparable store sales for fiscal 2009. Additionally, the Company’s earnings for fiscal 2009
will be impacted by lease termination and severance costs from the US and Australia store closures, totaling
up to an estimated $0.12 of EPS for fiscal 2009(SBUX 2008 Annual Report).”
Panera’s price/earnings ratio is comparatively higher than most businesses in the special
eateries industry, but it’s not abnormally high like Starbucks’ is. This is a good indication that
Panera’s investors are expecting to see continuations of the constant growth Panera has shown
over past years. Starbucks’ very high P/E ratio coupled with its dismal financial outlook indicate
that, just like it’s coffee, Starbucks’ stock is overpriced compared to Panera’s-- especially when
earnings per share are evaluated. Although the nominal price per share of each stock would make
Panera’s stock look more expensive, (50.22 to 14.17 per share, respectively) the price/earnings
ratio helps investors indicate the real value of the stock, in which Starbucks’ stock is actually more
“expensive.”
The second statistic I looked at during my comparison was the debt-to-equity ratio.
Starbucks and Panera have similar debt-to-equity ratios with Starbucks having $0.33 of debt per
dollar of equity and Panera at $0.35. These low ratios indicate that both companies are exposing
themselves to a lot of equity to finance growth versus debt. Panera and Starbucks have low-to-average debt-to-equity ratios for the industry. These low debt-to-equity ratios are an indicator of
debt control and stability.
Another important set of data I compared was the current and quick ratios. Although
Panera and Starbucks are both operating with current ratios below the optimal 2:1 ratio, a current
ratio less than one is common in the restaurant industry. Both companies’ current ratios have
remained constant over the past few years. Panera is in better shape because it has a current ratio
higher than one, while Starbucks might struggle if it had to pay all liabilities at once. Considering
these companies are long established leaders in their industry and have successfully operated at
similar current ratios, these ratios don’t indicate significant issues. When the stricter quick ratio
comparison is considered, Panera has an edge over Starbucks in terms of short-term financial
health. A larger proportion of Panera’s current assets are made up of cash and cash equivalents
than in Starbucks’ current assets. This difference is demonstrated by the quick ratio comparison,
which is double for Panera (0.9) than Starbucks (0.4). This is because of the large amount of
inventories listed as a part of Starbucks’ current assets. However, this quick ratio is normal for
Starbucks compared to their historic quick ratios. Although both companies’ quick ratios are lower
than other companies’ desirable quick ratio, the ratios are normal for the special eateries industry
since high levels of inventory are sold and converted to cash on a daily basis. Since both companies
are large, growing and profiting, these consistently low quick ratios show no serious trouble to
either company, although Panera is safer should a financial crisis arise.
Comparisons of the EPS get complex with Starbucks since they released a non-GAAP EPS of
$0.71 after the annual report. However, when comparing the annual report’s GAAP EPS, Panera has
a huge advantage with an EPS of $2.22 versus Starbucks’ EPS reported $0.43. Even when the nonGAAP EPS is considered, Panera’s stock looks more enticing since its average earning per share is a
lot higher than Starbucks’. Furthermore, Panera’s EPS is strongly estimated to rise consistently to
$3.00 by December 2010. Starbucks’ EPS is estimated to rise over the next two years as well to an
EPS of $0.83 in September 2010. This indicates that while both companies are predicted to remain
profitable, Panera will have higher earnings than Starbucks and will therefore be more profitable
for investors.
After comparing these financial statistics of Panera and Starbucks based on data provided
by the companies’ 2008 annual reports, I believe that Panera is the company that is in overall better
financial health. There are a few financial findings that led me to this belief. First, Starbucks’ P/E
ratio is abnormally high. Although, this means that investor’s are expecting to see good earnings
from Starbucks in the future, Starbucks’ financial outlook is less than promising. Starbucks is
struggling with a discretionary product in a down economy. The widely-held belief that their
products are overpriced is causing a decrease in sales. Panera isn’t exactly cheap either, but their
wider menu selection offers healthier, family-friendly foods on top of their freshly baked pastries
and brewed coffees. Starbucks is associated with guilty pleasures, paying extra for the coveted
green logo, and a selected coffee is the only fresh menu item. However, Starbucks plans to launch
several marketing strategies making their products more affordable for consumers without losing
quality. It’s hard to say if these marketing strategies aimed at penny-pinching customers will win
over other companies attempting the same tactics. The second reason I believe that Panera is in
better financial health is because of its high earnings per share rate. Starbucks’ EPS of $0.43 can’t
stand up to Panera’s EPS of $2.22. Lastly, should financial crisis become an issue for either
company, Panera is definitely a safer bet when it comes to the quick ratio. Even with the benefit of
a doubt that Starbucks will turn its inventory quickly to produce more cash, Starbucks’ quick ratio
of $0.40 is not exactly reassuring for investors. Yes, Starbucks is the leader of specialty coffee sales
in the world, and I don’t expect any serious financial trouble bringing the business down soon; but
when you consider all the statistics together, Panera is more enticing to me as a potential investor.
Whether I would even choose to risk investment on a special eatery industry company
during an economic recession is questionable. But, if the economy does start expansion again,
consumers will be more than happy to start spending again on these luxury goods that they had to
give up during the recession. This would reflect positive growth for Panera and Starbucks in the
future if investors are confident and loyal enough to stick with the companies for the long-haul.