FIN 320 Final Project Part II

FIN-320 Final Project Part II

Southern New Hampshire University

Starbucks Corp. (SBUX) and Dunkin’ Brands Group Inc. (DNKN) are the two largest eatery chains in the United States that specialize in coffee. Both companies offer similar coffee options with different food options. Both have similar overall strategies.  From 2016-2018, Starbucks had a 3 year rate of return of 15.99%. Dunkin’ Brands rate of return for the same time three year period was 56.62%. While Starbucks three year rate of return was solid, Dunkin’s rate of return is more than three times Starbuck’s. Both Starbucks and Dunkin’ have shifted focus recently to include more products aimed at afternoon and evening customers, as well as mobile ordering and deliver. However, there are key differences in their business models related to scale, store ownership, and branding that could be affecting their bottom lines.

Ratio analysis is an important tool used by financial managers to help understand the financial trends over time. It provides managers with key indicators to a company’s performance within and can be directly compared to other companies in the same industry. The financial health of both Starbucks and Dunkin’ is strong. The current ratio, which measures the ability to pay off all liabilities, should be low. Starbucks has been steadily increasing. Dunkin’ had a higher ratio in 2017 but dropped in 2018 almost back to where it was in 2016.

Starbucks certainly has more free cash flow, however nearly all of Dunkin’ Brands locations are franchises. Company-operated stores have different operations and capital expense structures from franchised locations. Cost of goods sold (COGS) and store operating expenses are a much larger percentage of sales for Starbucks than Dunkin’. Because COGS is so much more prominent in Starbucks’ expense structure, its profits are more severely impacted by changes in coffee bean prices. Starbucks also has a higher capital expense burden than Dunkin’ Donuts, which is not obligated to purchase kitchen equipment for franchise locations (Investopedia, 2019).

Although these two companies are direct competitors they both have their strengths and weaknesses. Starbucks is very consistent and methodical and it’s apparent in its financial data. There is never a spike or dip in their numbers just consistent growth. I would consider Starbucks to be a value company because of these reasons. On the other hand I would consider Dunkin’ Brands to be a growth company. Over the last three years they have had huge spikes of growth and although each year they grow more and more their growth isn’t consistent from year to year. Both companies are worth investing in, depending on what your portfolio needs and what type of risk you are willing to take.

If we look at three year averages between the two companies, Dunkin’ Brands has a better Current Ratio, Earnings per Share, Return on Equity, and Net Profit Margin. Their closing price on the last business day in December was also higher than Starbucks. Based on these averages, I personally would recommend investing in Dunkin’ Brands over Starbucks.

References

Coffee Shops. (n.d.). Retrieved from http://valuationresources.com/Reports/SIC5812CoffeeShops.htm

Titman, S., Keown, A. J., & Martin, J. D. (2014). Financial management: Principles and applications (12th ed.). Upper Saddle River, NJ: Prentice Hall.

Mergent Online. (2018). Competitors Retrieved June 15, 2018 from: http://www.mergentonline.com.ezproxy.snhu.edu/mergenttools.php?mmttype=companyanalysislist&win=compvscal

Mergent Online. (2018). Starbucks Retrieved June 15, 2018 from: http://www.mergentonline.com.ezproxy.snhu.edu/companyfinancials.php?pagetype=asreported&compnumber=73271&period=Annuals&dataarea=BS&range=3¤cy=AsRep&scale=AsRep&Submit=Refresh

https://www.investopedia.com/articles/markets/120215/starbucks-vs-dunkin-donuts-comparing-business-models.asp