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Forecasts for Growth Starbucks and the FutureTerm Paper

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Financial Forecasting: Starbucks

Starbucks is a leading household name for coffee and consumer beverages. Recently, the company has built an aggressive growth strategy that aims to increase not only the number of stores around the globe, but also by vastly increasing its available products. The company has adopted new products that go far beyond coffee, including various foods. Moreover, it has taken an innovative approach to consumer buying methods by introducing a Mobile Pay app. All of the implementations of this impressive growth strategy are definitely set to have an impact on the company's financial health. This research aims to explore forecasts for the next five years to evaluate the success of such an aggressive growth strategy.

Forecasted Financial Statements

Income Statement Account: Costs of Goods Sold

2011

2012

2013

2014

In Millions

10710

11720

12630

2015

2016

2017

2018

2019

16520

18152

19960

21970

24056

Additionally, the company is also expanding its product lines as well in order to increase sales revenue and boost average sales per customer. The company acquired a new tea line, Teavana in 2012 and has incorporated a wider variety of tea-based drink options for consumers that will continue to boost sales throughout the next five years. Starbucks is also diversifying its food options as well. Dozens of new food products are being launched currently and over the next few years. According to the financials published, inventory has been growing at about 20% annually. These options will draw in new customers, add more value per individual sales, and will increase the cost of operating since fresh foods will prove an added cost. The Cost of Goods Sold has a historical average of 80% of sales revenue, which can then be used to calculate the future Cost of Goods Sold for the next five years.

Income Statement: Sales Revenue

2011

2012

2013

2014

In Millions

14890

16450

2015

2016

2017

2018

2019

20620

22690

24950

27460

30070

Based on the amount of growth expected, the company recently launched forecasted revenue statements into 2019. The company is predicting an annual growth rate in revenues of about 13.15% of the previous year's totals. Based on this and using the historical revenue data, the forecasted data can be calculated to show impressive growth in sales up into 2019.

Balance Sheet: Cash

2011

2012

2013

2014

In Millions

2015

2016

2017

2018

2019

Ultimately, Cash Flow and revenues are thought to be increasing dramatically over the next five years. The forecasts used expected numbers produced by the company for the Cash Flow and Sales Revenues, based on the additions of new products and locations. In 2011, Cash Flow was 9.8% of Sales Revenue, in 2012 that number dropped down to 8.9%. In 2013, the number increased dramatically to 17.7% and dropped back down to 7.1% in 2014. The historical average of these changes states that Cash Flow is about 10.8% of the company's sales. This can then be used to calculate future Cash Flow numbers.

Balance Sheet: Accounts Receivable

2011

2012

2013

2014

In Millions

2015

2016

2017

2018

2019

Such product and location changes, along with the increasing health of the economy, are expected to have a major impact on the financial health of the company. The net Cash Flow forecasts shows increases over the next five years. This research can use each percentage of expected revenue to then calculate Accounts Receivable. According to the 2015 forecasts, Accounts Receivable made up 6.1% of all Sales Revenue. This number can then be used to calculate the Accounts Receivable for the next five years, since growth will be sustained at a very similar rate.

Income Statement

2011

2012

2013

2014

Sales Revenue

14890

16450

Cost of Goods Sold

10710

11720

12630

Gross Income

Interest Expense

33.3

32.7

38.5

70.3

SG&A Expense

Income Tax

1.09

Net Income

Forecasted Income Statement

2015

2016

2017

2018

2019

Sales Revenue

20620

22690

24950

27460

30070

Cost of Goods Sold

16520

18152

19960

21970

24056

Gross Income

Interest Expense

61.5

67.5

74.85

82.35

90

SG&A Expense

Income Tax

Net Income

The aggressive growth strategy is bound to have a major impact on the income statement over the next five years. As previously stated, the company is increasing its offered products dramatically, which will impact Accounts Payable based on the increased costs of more specialized foods products and equipment needed to store them. This will have a huge impact on investment as well. The company will continue to invest a much higher amount until 2018 and 2019, when the strategy is set to slow down. Recently, the company also launched its Mobile Pay and Rewards system. This is a system that is accessible of smart phones and computers, allowing customers to add money to their Starbuck's accounts ahead of time and then scan their barcode at the point of purchase. Users can also now order ahead of time to avoid the line. Each purchase on the Mobile Pay app also racks up reward points that increase customer loyalty. The added feature is also thought to be a major factor in increasing revenue and is one that will not incur larger operating costs in the future. The company has been increasing investments about 38% in the last two years. This is likely to increase again for 2015, but slow significantly to a conservative number of 10% as the strategy is solidified and less investment is needed. Again, such increases will also increase inventory.

Balance Sheet

2011

2012

2013

2014

ASSETS

Cash

Accounts Receivable

Inventories

Other Current Assets

Total Current Assets

Net Property, Plant & Equipment

Total Investments and Advances

Intangible Assets

Other Assets

Total Assets

10625.6

14712.9

13750.2

LIABILITIES

Accounts Payable

Income Tax Payable

0

1.3

1

4.2

Other Current Liabilities

Total Current Liabilities

2080

Long-Term Debt

2050

Deferred Taxes

-86.7

-956.9

-896.4

-761.1

Other Liabilities

Total Liabilities

11503.9

Common Equity

EQUITY

Total Shareholder's Equity

Liabilities & Shareholder's Equity

14557.8

19041.8

24053.1

24462.5

Forecasted Balance Sheet

2015

2016

2017

2018

2019

ASSETS

Cash

Accounts Receivable

Inventories

Other Current Assets

Total Current Assets

Net Property, Plant & Equipment

Total Investments and Advances

Intangible Assets

Other Assets

Total Assets

17200.2

18858.8

20925.4

22512

24445.4

LIABILITIES

Accounts Payable

Income Tax Payable

5.4

6.8

7.4

8.2

9

Other Current Liabilities

Total Current Liabilities

Long-Term Debt

Deferred Taxes

-761.1

-761.1

-761.1

-761.1

-761.1

Other Liabilities

Total Liabilities

10230

10931.2

11392.8

12134.4

Common Equity

11119.2

12311

EQUITY

Total Shareholder's Equity

11119.2

12311

Liabilities & Shareholder's Equity

30750.8

33750.8

37583.4

40575.8

44121.8

There are a number of forecast assumptions that help fill in the forecasted balance and income sheets for the company over the next five years. Accounts Payable will also increase, as the company is now expected to spend more on new products, but also extended hours and employee pay. Between 2014 and 2015, the company saw a 200% increase in Accounts Payable based on the launch of the new aggressive growth strategy. This increase is expected to continue, but not to such a high extent. A conservative estimate would set an increase in Accounts Payable for 80% for the first two years, with 60% for the next three as products solidify and become a permanent addition to the company.

Moreover, the company has committed to a strong strategy of growth, both in terms of operating locations and product offerings. Starbucks is increasing its market presence internationally, with an estimated 3,000 new stores all over the globe by 2019 (Starbucks, 2014). Moreover, the company is also launching nearly 1,000 new drive-thru locations across the United States. This means that the property assets and long-term debt will increase dramatically based on the new stores being launched. Starbucks is also launching a new strategy known as the Starbucks Evening experience, which is a late night option for adults over the age of 21. The addition is expected to add an additional $1 billion in revenue by 2019 (Starbucks, 2014). New locations will undoubtedly have a huge impact on property asset accounting. In 2014, there was an estimated 21,000 Starbucks locations worldwide. Using this number, one can assume that each location adds about a $167,619 value to the property assets, based on dividing the net amount of property assets by the number of locations. This means that by 2019, there is expected to be a growth of 4,000 locations, or an additional $670 million added to property assets, which can be averaged over the five-year span so that the increase in property value is set at $134 million each year.

Fundamental Valuation

For the fundamental valuation of Starbucks, this current research application used the Dividend Discount Model (DDM) because it was the most appropriate given the financial information found within the context of the study. The DDM allows analysts to valuate the stock prices through the use of predicted dividends, which are then set at a discount in order to represent their present value.

The following formula was used in Microsoft Excel:

P = E1Q + E2Q2 + ... + ENQN + ENQN x Q/(1 - Q)… [END OF PREVIEW]

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