Starbucks and Panera Bread: A Cross Sectional and Time Series View

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 |  Includes: PNRA, SBUX
by: Daniel Andres Jacome

It’s not just potent, aromatic caffeine: Starbucks (NASDAQ:SBUX) also knows how to make bucks. In this brief report, we attempt to understand the drivers of Starbucks’ success. Five important liquidity, efficiency, and profitability ratios are examined, both from a cross sectional (with Panera Bread (NASDAQ:PNRA) serving as a point of comparison) and time series vantage point to demonstrate what degree of success Starbucks enjoys among its suppliers, customers, and investors.

Cash Conversion: How Much Clout Does Starbucks Have?

SBUX logo The first ratio studied was the cash conversion cycle for Starbucks, also known as “days in cash operating cycle.” Interestingly, Starbucks was able to convert its resources into cash faster than the previous year (2005), which is to say that cash spent less time in the operating cycle. We assume this is directly related to the “stretching effect” experienced by another ratio, the days in accounts payable, which essentially tells us that Starbucks was able to negotiate with those it makes purchases from and insure that those supplier gets paid later (and thus Starbucks’ account payables turnover decreased from 12.98 to 11.62 in 2006).

This may be a transitory or longer term event. However, it is safe to say that this has resulted in higher cash flow for Starbucks and thus, an abbreviated cash conversion cycle. From a cross-sectional viewpoint, one sees that Starbuck’s strong(er) position with its suppliers places the firm at an advantage to rivals like Panera Bread. Panera Bread, which presumably holds less clout and negotiating power with its suppliers, pays its providers more frequently and thus turns over its accounts payables faster.

Short Term Debt Not a Material Concern

Another ratio examined was the firm’s EBIT-to-interest expense ratio. We see that the ratio has decreased since 2005, presumably due to the extra short term debt that Starbucks assumed in 2006. This purveyor of specialty coffee has enjoyed rocket-like growth since its inception and done so with little to no leverage, thus the impressive times interest earned numbers dating back to 2001. However, as is well-known, Starbucks is gradually entering a more mature phase of its life cycle and thus we are not surprised to see debt enter the firm’s capital structure, albeit short term and relatively small when pressed against the firm’s otherwise strong balance sheet and frequent stock buyback programs. Without much leverage, Starbucks has been able to command a higher stock price and above-average P/E multiple within its immediate peer group.

You Got an Addiction? Good, Now Give Us Your Money

The last ratio explored – as with the accounts payable ratio, cross sectional in nature – was the gross margin for Starbucks Coffee. Make no mistake: when compared to rival Panera Bread, Starbuck’s gross margin towers above that of the café and bakery chain. There are multiple ways to deconstruct this, but we believe SBUX’s high gross margin is a direct reflection of its ability to purchase its coffee beans at steeply low costs [COGS] and sell its finished products, namely, specialty coffees, at exorbitantly high prices. SBUX enjoys a robust margin profile, we think, due to the brand loyalty and ubiquity it commands in the marketplace. Starbucks has become a premier beverage-cum-entertainment behemoth that has capitalized on its marketing savvy, delicious coffee blends, and furious new store expansion regimen.

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Sbux-panera profitability ratios
Sbux-panera efficiency ratios 1
Sbux-panera efficiency ratios 2
Sbux Panera liquidity ratios 1
Sbux Panera liquidity ratios 2

Conclusion

In conclusion, we posit that Starbuck’s success is driven by many factors, but inarguably by three critical ones: robust margins, a shortened cash conversion cycle (resulting in higher cash flow), and a bulletproof capital structure that eschews both excessive shareholder dilution and financial leverage.

Disclosure: At the time of publication, the author did not hold a position in any of the securities mentioned.