Starbucks And Wendy's In Their Annual Reports example essay topic

Introduction Wendy's International, Inc., incorporated in 1969, is primarily engaged in the business of operating, developing and franchising a system of quick-service and fast-casual restaurants. As of December 28, 2003, there were 6,481 Wendy's restaurants (Wendy's) in operation in the United States and in 21 other countries and territories. Of these restaurants, 1,465 were operated by the Company and 5,016 by its franchisees. As of December 28, 2003, the Company and its franchisees operated 2,527 Tim Hortons (Hortons) restaurants with 2,343 restaurants in Canada and 184 restaurants in the United States!] Smart money, 2004. Starbucks Corporation purchases and roasts whole bean coffees and sells them. As of September 28, 2003 (fiscal year-end 2003), Starbucks operated a total of 4,546 retail stores.

Starbucks sells coffee and tea products through other channels, and, through certain of its equity. The Company has two operating segments, United States and International, each of which include Company-operated retail stores and Specialty Operations. Starbucks opened 602 new Company-operated stores during fiscal 2003. As of fiscal year-end, Starbucks had 3,779 Company-operated stores in the United States, 373 in the United Kingdom, 316 in Canada, 40 in Australia and 38 in Thailand. !] Smart money, 2004! ^In this financial analysis report, I will compare and contrast these two companies! | finance based on their annual report and related websites.

There are four parts in this report. It includes Financial Ratios, WACC, Working Capital and Dividend policy. Part c^1 Compare and Contrast of the Financial Ratios Profitability Ratios The Retails-Eating Places industry is a very competitive area for companies to survive. Both Starbucks and Wendy's are excellent companies to earn a lot of profit in this industry. Return on sales (ROS): Harrington (2004) said that! SS this ratio indicates that what percentage of each dollar of revenue is available for the owners after all the expenses are paid to other suppliers.

This ratio is related to net income and net sales which I found from the income statements of both Starbucks and Wendy's in their annual reports. The return on sales is the key profitability ratio. This ratio tells the analyst what proportion of the revenues remain after all expenses are met. !" In chart 1, it is clear that Wendy's always has higher ROS than Starbucks from 1999 to 2003. Companies with low ROS may have high costs of production; high marketing, selling, or research expenses; or combination of these (Harrington, 2004). Compare with Wendy's, Starbucks uses the strategy that lowering the sales price normally increases unit volume.

The result is the profit margins lower than Wendy's. Chart 1 Gross margin: It indicates the profit a company earns after direct costs of production (Harrington, 2004). There are two kinds of data to be used for calculating gross margin. One is gross profit, and the other is net sales.

Net sales of these two companies are from their annual income statements. I found the gross profit of Starbucks in the! mart money!" website. For Wendy's gross profit, I calculate it; the gross margin or profit is simply revenues minus cost of goods sold (Harrington, 2004). The industry ratio is from!

SSYahoo Finance!" website. Chart 2 shows that Starbucks has a lower gross margin than Wendy's except the year 2003. I t means Starbucks has more earning to cover the direct costs of producing or obtaining the products it sold than Wendy's. However, in the year 2003, Starbucks had a high gross margin because of the huge gross profit in the annual income statement. It attributed that Starbucks opened 602 new Company-operated stores during fiscal 2003 (Smart money, 2004). For Wendy's, its gross margin almost was close to the industry rate of 2003.

The cost for goods sold of Wendy's is stable and normal as a retails-eating place. Chart 2 EBIT / Sales: It is the ratio that implies how much a company spends on non production-related expenses depends, among other things, on the importance of new product development and the efficiency of corporate headquarters (Harrington, 2004). In! mart money!" website, I got two companies! | EBIT for 5 years. EBIT stands for earnings before interest and taxes (Harrington, 2004). According to chart 3, Wendy's always keep a level that produces and markets its goods profitably.

The ratios from 5 years all were higher than the industry level. Although Starbucks had a very high gross margin in 2003, it did not have high EBIT / Sales in 2003. The reason is when it increased the sales, the operating expense and non operating expenses also increased for opening 602 new stores. (EBIT = revenues! V cost of goods sold!

V operating expenses! V non operating expenses, gross margin = revenues! V cost of goods sold) Chart 3 Asset Utilization Ratios This main focus of this part will be on assets. Most companies need assets to produce sales revenues and ultimately, profits.

Asset utilization ratios indicate how effectively or efficiently a company uses its assets (Harrington, 2004). TATO: Total asset turnover is used to indicate a company's degree of operating leverage (Harrington, 2004). For calculating this ratio, I used total asset of Starbucks and Wendy's which is reported in their annual balance sheet. As Chart 4 imply, both Starbucks and Wendy's have used the assets effectively and efficiently based on the TATO are over 100%. Their net sales are more than the total assets in the balance sheet. However, this ratio depends on the different industries such as capital intensity and labor intensity.

Starbucks and Wendy's are both labor intensity company. They are quite asset efficient, because their products are produced with a high level of labor and relatively little capital investment (Harrington, 2004). Apparently, Starbucks is better than Wendy's in this ratio every year. Chart 4 Payables payment period: This ratio is related to the efficiency with which the company manages its short-term liabilities, and the company's supplies also want to judge how often the company pay its suppliers in relation to what it purchased from them (Harrington, 2004).

The data for calculating this ratio include accounts payable and cost of sales. The first data is available in companies! | annual balance sheet, and the cost of sales is the same as cost of goods sold. The retails-eating industry has very little account receivable. Customers seldom use credit card to pay for their bills in the Starbucks and Wendy's.

Therefore, the more payable's payment period they have the more benefit they can get. They can use their suppliers as a source of funding (Harrington, 2004). In the other hand, if company uses this strategy too much, the suppliers will consider it has limited ability to manage its short-term liabilities or has a bad credit in business. Chart 5 shows that Wendy's always has more payable's payment period than Starbucks, and it has a decline trend from 1999 to 2003. Chart 5 Capitalization ratios Harrington (2004) said that capitalization or financial leverage ratios provide information about the sources the company has used to financial its investment in assets.

The financial leverage is used to indicate the impact debt financing has on the returns of the company to its owners, the shareholders. Long-term debt to equity: It uses as the sum of the long-term debt and equity used to finance the business. Lenders, who may provide a large portion of the company's capital resources, are especially interested in the way the company is capitalized (Harrington, 2004). The long-term debt are available in companies! | annual balance sheets. Financial analysts are more concentrated with the firm's long-term debt than its short-term debt because the short-term debt is constantly changing (Ross, Westerfield, Jordan, and Roberts, 2001). As we can see in Table 1, Starbucks not only has a little proportion of long-term debt, but this ratio also declined year by year.

Wendy's long-term debt to equity is much higher than Starbucks in every year, but it never pass the industry's level. Obviously, the lenders such as bondholders and bankers typically prefer both these two companies for low debt ratios because they provide greater security for their loans. It focuses on expenses control, assets utilization and debt utilization. It indicates that how these factors combine to determine the return for shareholders.

Return on equity = ROS! ~TATO! ~Financial leverage (Harrington, 2004). I calculate ROE directly from: net income / equity. They are all in the annual income statement and balance sheets.

The industry ROE ratio is from! Chart 6 Chart 6 shows that Wendy's ROE were higher than Starbucks every year. According to Harrington, the higher assets a company uses to generate sales, and the less debt it uses to finance those assets, the lower the return shareholders can earn. As I discussed before, Starbucks that has very little long-term debt during these years demonstrates this concept.

However, Wendy's also did not reach the industry level of 2003. Current ratio: It measures the company's ability to pay its current liabilities using current assets and reflects the size of short-term obligations (Harrington, 2004). Current ratio is the proportion of current assets in current liabilities. The current assets and current liabilities are all from the companies! | annual balance sheets. A current ratio greater than one is preferable. Companies with high current ratio are considered more liquid than those with low liquidity ratios.

Their short-term assets are greater than their short-term liabilities. They have the good ability to pay off its short-term obligations. Obviously, Starbucks has higher current ratios than Wendy's and industry in chart 7. Wendy's has a decline trend of current ratio from 1999.

They increased the liability in their balance sheet every year. Chart 7 Market Ratios These ratios analyzing the company's financial market performance because the company's internal performance should be reflect in the capital market's evaluation (Harrington, 2004). In this part, there are some ratios require the market price of the company. I found their market price in the! SSYahoo Finance!" website according to the date when the annual financial statements of two companies were reported.

I assume that these prices were happened at the same date. Earnings per share: It shows how much money a common share earns in the company. I used net income to divide the umber of common shares outstanding based on Starbucks and Wendy's annual report. This ratio related to the return on equity. As we can see in Chart 8, the earnings of Starbucks per share are far from the Wendy's. Starbucks did not use increasing the debt to make more profit for their shareholders.

Chart 8 PE ratios: It can be used to evaluate the relative financial performance of the stock. It indicates that how much investors are willing to pay for a dollar of the company's earnings (Harrington, 2004). I used the closed market price of Starbucks every Sep 28th from 1999 to 2003. The Wendy's were from every Dec 28th in these 5 years. Investors expect companies with high PE ratios to grow, to have more rapid increase in dividends in the future. Companies with higher sustainable growth rates are expected to have higher PE ratios.

In Chart 9, Starbucks has much higher PE ratio than Wendy's. Especially in year 2000, Starbucks had the highest PE ratio, but this situation depended on the high market price in the year 2000. We can conclude that Starbucks have a higher growth rate than Wendy's, because the retain earnings of Starbucks that were provided in annual report were really high and it kept the increasing trend. Chart 9 Market-to-book value: This ratio relates the market value per share of common stock to the book value or net worth per share. If a market-to-book value ratio is greater than 100 percent indicates that shareholders are willing to pay a premium over the book value of their equity (Harrington, 2004). For calculation, I made the book value per share first.

It is calculated by dividing shareholders! | equity on the statement of financial balance sheets by the number of shares outstanding (Harrington, 2004). This ratio has two different aspects for the shareholders and investors. For shareholders, they wish this ratio can grow every year; because the higher market-to-book value ratio, the higher return from their investment. However, the investors who want to be a shareholder of this high ratio company would reconsider to buy the stock because the market does not really reflect the company's performance and the future growth of the market price would not be optimistically.

Chart 10 shows that Starbucks has higher market-to-book value ratio than Wendy's, especially in the year 2000 which related to high market price that year. It is a risk for investors to buy the Starbucks! | shares rather than Wendy's. What is more, Wendy's market-to-book value ratios were under the industry level. It means the market price of Wendy's has enough space to grow in the future.

Plus, the ROE of Wendy's were higher than Starbucks; the investors would get more benefit from them. Chart 10 Part co The analysis of Weighted Average Cost of Capital Weighted Average Cost of Capital (WACC) is a calculation of a firm's cost of capital that weights each category of capital proportionately. In the WACC calculation are all capital sources, including common stock, preferred stock, bonds, and any other long-term debt. WACC is the average of the cost of each of these sources of financing weighted by their respective usage in the given situation. WACC is the average of the cost of each of these sources of financing weighted by their respective usage in the given situation (McClure, 2004). When financial managers evaluate their investment opportunity set, they consider the weighted average cost of capital (WACC) to be the appropriate discount rate by which all future cash flows are converted to a present value (Seiler, M., 1996).

WACC is calculated by multiplying the after-tax cost of debt and equity by their respective portions in the company's expected capital structure. (Harrington, 2004) Where: Re = cost of equity Rd = cost of debt = the market value of the firm's equityD = the market value of the firm's debt = E + DE / V = percentage of financing that is equityD / V = percentage of financing that is debt Tax rate = the corporate tax rate Harrington (2004) said that! SS there are two categories of methods used to estimate the required return on equity. The first category places a value on the cash the company generates for its shareholders. The second category includes all capital market-based estimates.

!" Based on Starbucks and Wendy's situation, I decided use the Capital Asset Pricing Model (CAPM) to calculate the return on equity for both companies. There are several reasons. First, Starbucks did not have dividends, but Wendy's has. Second, both Starbucks and Wendy's did not have bonds. Third, they did not pay out all earnings to its shareholders nor create value for its shareholders with any funds that it retains. (Harrington, 2004) Where: j = Term to denote a particular ass etf " Of = fn measure of the risk for an asset Rm = Return required on an asset of average risk Rf = Return required on a hypothetical risk-free asset Re = return required on equity Since checking in! mart money! | website and their annual report, Starbucks and Wendy's did not have any bond and preferred share during 1999-2003, I assumed that their bond grade is BAA.

The Federal Reserve informed that the tax rate of BAA bond grade on October 14th 2004 was 6.16%. The WACC calculation is in Table 2. Investors use WACC as a tool to decide whether or not to invest. The WACC represents the minimum rate of return at which a company produces value for its investors (McClure, 2004). From Table 2, we can see that the WACC of Starbucks is higher than Wendy's.

It indicates that if investors want to invest the money to these two companies, Wendy's shares are preferred. The higher WACC, the more income Starbucks should pay to cover the cost of debt and equity. Considering that Starbucks has a low ROS, it is riskier for investors to buy its shares than Wendy's because WACC represents the investors' opportunity cost of taking on the risk of putting money into a company (McClure, 2004). In the company's aspect, Starbucks should be aware of the high WACC, because it will cost more to use the capital to implement any new projects.

Part c Working capital management Working capital refers to the cash that a business requires for everyday operations or finances the conversion of raw materials into finished goods, which the company sells for payment. It includes inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength (McClure, 2004). Net working capital / sales ratio: It indicates the dollars that need to be invested for each new dollar of sales (Harrington, 2004). Net working capital is current assets minus current liabilities. I found all data from the two companies! | annual balance sheets.

Based on Chart 11, all NWC / sales ratios of Starbucks were positive, but the ratios of Wendy's were declining every year, even in the negative number from 2001. Since these two companies are from retails-eating industry, they do not have trouble with inventory and account receivable, because they do not need big inventory to produce, and people always pay their bills by cash. Starbucks did not have much long-term debt, so its current liability always was less than the current assets. Wendy's increased its long-term debt from 1999 to 2003; this is the reason that Wendy's current liability became more and more.

McClure (2004) said! SS if a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors that want their money quickly. !" Actually, Wendy's just used the financial working capital method to operating the cash flow. Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's ability to fund operations, reinvest, and meet capital requirements and payments (McClure, 2004). Chart 11 Part c 1/4 Dividend policies Dividends are the distribution of corporate earnings to company shareholders (Harrington, 2004).

According to Wendy's annual report, it paid $0.24 for each share every quarterly (Table 3). McClure (2004) indicated that! SS with the stability policy, companies may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or they may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In either case, the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them with income. !" In my assumption, Wendy's dividend policy was a strategy to maintain their shareholders by giving them dividends from the earnings. Dividends are attractive for investors looking to secure current income.

Modigliani and Miller had a very famous theory called Dividend Irrelevance Theory. It said dividend policy has no effect on either the price of a firm's stock or its cost of capital. This is because the value of the company is derived only from its expected return and risk, not from whether it pays dividends (Harrington, 2004). However, this theory is unrealistic in the real business world. Table 3 Wendy's 1999 2000 2001 2002 2003 Dividends per common share 0.24 0.24 0.24 0.24 0.24 In another hand, Starbucks did not pay any dividends to their shareholders from 1999 to 2003. Of course, no dividend payment is still a dividend policy for Starbucks.

McClure (2004) stated that! SS no dividend payout is more favorable for investors. Supporters of this policy point out that taxation on a dividend is higher than on capital gain. !" If a company prefers to pay dividends, the return of investors will charge double taxations.

In despite of paying tax for company's income, the investors should pay tax for the dividends too when they received them from the firm. Some investors would like prefer the company does not pay dividends, because they can expect more return by the growth of company in the future. Starbucks! | dividend policy is to reserve earnings for future investment. Starbucks is the kind of company that is in the fast growing situation, it was planning to have more market over the world.

Therefore, it needs a lot of earnings to invest. The company who reinvests funds (rather than pays it out as a dividend) will increase the value of the firm as a whole and consequently increase the market value of the stock. According to the proponents of the no-dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets (McClure, 2004).

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