Financial Analysis

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 StatesЎ]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 investees. 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. Ў]Smart money, 2004Ў^

In this financial analysis report, I will compare and contrast these two companiesЎ¦ 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 ў№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 WendyЎ¦s are excellent companies to earn a lot of profit in this industry.

Return on sales (ROS): Harrington (2004) said that Ў§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 WendyЎ¦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.ЎЁ In chart 1, it is clear that WendyЎ¦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 WendyЎ¦s, Starbucks uses the strategy that lowering the sales price normally increases unit volume. The result is the profit margins lower than WendyЎ¦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 Ў§smart moneyЎЁ website. For WendyЎ¦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 Ў§Yahoo FinanceЎЁ website.

Chart 2 shows that Starbucks has a lower gross margin than WendyЎ¦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 WendyЎ¦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 WendyЎ¦s, its gross margin almost was close to the industry rate of 2003. The cost for goods sold of WendyЎ¦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 nonproduction-related expenses depends, among other things, on the importance of new product development and the efficiency of corporate headquarters (Harrington, 2004). In Ў§smart moneyЎЁ website, I got two companiesЎ¦ EBIT for 5 years. EBIT stands for earnings before interest and taxes (Harrington, 2004). The industry ratio is from Ў§Yahoo FinanceЎЁ website.

According to chart 3, WendyЎ¦s always keep a level that produces and markets its goods profitably. The ratios from 5 years all