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Starbucks Corp. (NASDAQ:SBUX)

Analysis of Goodwill and Intangible Assets

Advanced level

Accounting Policy on Goodwill and Intangible Assets

Goodwill

Starbucks evaluates goodwill for impairment annually during the third fiscal quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of store closures, that would indicate that impairment may exist. When evaluating goodwill for impairment, Starbucks may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If Starbucks does not perform a qualitative assessment, or if Starbucks determines that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, Starbucks calculates the estimated fair value of the reporting unit. Fair value is typically calculated using a discounted cash flow model. For certain reporting units, where deemed appropriate, Starbucks may also utilize a market approach for estimating fair value. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value.

As part of the ongoing operations, Starbucks may close certain stores within a reporting unit containing goodwill due to underperformance of the store or inability to renew the lease, among other reasons. Starbucks may abandon certain assets associated with a closed store, including leasehold improvements and other non-transferable assets. When a portion of a reporting unit that constitutes a business is to be disposed of, goodwill associated with the business is included in the carrying amount of the business in determining any loss on disposal. Starbucks’ evaluation of whether the portion of a reporting unit being disposed of constitutes a business occurs on the date of abandonment. Although an operating store meets the accounting definition of a business prior to abandonment, it does not constitute a business on the closure date because the remaining assets on that date do not constitute an integrated set of activities (substantive processes) and assets that are capable of being managed for the purpose of providing a return to investors. As a result, when closing individual stores, Starbucks does not include goodwill in the calculation of any loss on disposal of the related assets.

Starbucks recorded goodwill impairment of $10.5 million, $37.6 million and $87.2 million during fiscal 2019, 2018, and 2017, respectively.

Other Intangible Assets

Other intangible assets include finite-lived intangible assets, which mainly consist of acquired and reacquired rights, trade secrets, licensing agreements, contract-based patents and copyrights. These assets are amortized over their estimated useful lives and are tested for impairment using a similar methodology to Starbucks’ property, plant and equipment, as described above.

Indefinite-lived intangibles, which consist primarily of trade names and trademarks, are tested for impairment annually during the third fiscal quarter, or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. When evaluating other intangible assets for impairment, Starbucks may first perform a qualitative assessment to determine whether it is more likely than not that an intangible asset group is impaired. If Starbucks does not perform the qualitative assessment, or if Starbucks determines that it is not more likely than not that the fair value of the intangible asset group exceeds its carrying amount, Starbucks calculates the estimated fair value of the intangible asset group. Fair value is the price a willing buyer would pay for the intangible asset group and is typically calculated using an income approach, such as a relief-from-royalty model. If the carrying amount of the intangible asset group exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. In addition, Starbucks continuously monitors and may revise the intangible asset useful lives if and when facts and circumstances change.

There were no significant other intangible asset impairment charges recorded during fiscal 2019, 2018, and 2017.

Source: 10-K (filing date: 2019-11-15).

Goodwill and Intangible Asset Disclosure

Starbucks Corp., balance sheet: goodwill and intangible assets

US$ in thousands

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Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
Acquired and reacquired rights 1,075,000  1,081,700  328,800  361,300  308,600  36,800 
Acquired trade secrets and processes 27,600  27,600  27,600  27,600  27,600  27,600 
Trade names, trademarks and patents 40,600  33,000  31,500  29,400  24,500  21,600 
Licensing agreements 16,200  14,300  14,400  16,000  13,400  — 
Other finite-lived intangible assets 22,000  25,600  6,700  7,200  6,500  3,800 
Finite-lived intangible assets, gross carrying amount 1,181,400  1,182,200  409,000  441,500  380,600  89,800 
Accumulated amortization (603,000) (371,000) (194,800) (148,100) (78,100) (28,900)
Finite-lived intangible assets, net carrying amount 578,400  811,200  214,200  293,400  302,500  60,900 
Trade names, trademarks and patents 203,400  215,900  212,100  207,800  202,800  197,500 
Other indefinite-lived intangible assets —  15,100  15,100  15,100  15,100  15,100 
Indefinite-lived intangible assets 203,400  231,000  227,200  222,900  217,900  212,600 
Other intangible assets 781,800  1,042,200  441,400  516,300  520,400  273,500 
Goodwill 3,490,800  3,541,600  1,539,200  1,719,600  1,575,400  856,200 
Other intangible assets and goodwill 4,272,600  4,583,800  1,980,600  2,235,900  2,095,800  1,129,700 

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

Item Description The company
Other intangible assets Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Starbucks Corp.’s other intangible assets increased from 2017 to 2018 but then slightly decreased from 2018 to 2019.
Goodwill Amount after accumulated impairment loss of an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Starbucks Corp.’s goodwill increased from 2017 to 2018 but then slightly decreased from 2018 to 2019.
Other intangible assets and goodwill Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Starbucks Corp.’s other intangible assets and goodwill increased from 2017 to 2018 but then slightly decreased from 2018 to 2019.

Adjustments to Financial Statements: Removal of Goodwill

Starbucks Corp., adjustments to financial statements

US$ in thousands

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Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
Adjustment to Total Assets
Total assets (as reported) 19,219,600  24,156,400  14,365,600  14,329,500  12,446,100  10,752,900 
Less: Goodwill 3,490,800  3,541,600  1,539,200  1,719,600  1,575,400  856,200 
Total assets (adjusted) 15,728,800  20,614,800  12,826,400  12,609,900  10,870,700  9,896,700 
Adjustment to Shareholders’ Equity (deficit)
Shareholders’ equity (deficit) (as reported) (6,232,200) 1,169,500  5,450,100  5,884,000  5,818,000  5,272,000 
Less: Goodwill 3,490,800  3,541,600  1,539,200  1,719,600  1,575,400  856,200 
Shareholders’ equity (deficit) (adjusted) (9,723,000) (2,372,100) 3,910,900  4,164,400  4,242,600  4,415,800 
Adjustment to Net Earnings Attributable To Starbucks
Net earnings attributable to Starbucks (as reported) 3,599,200  4,518,300  2,884,700  2,817,700  2,757,400  2,068,100 
Add: Goodwill impairment 10,500  37,600  87,200  —  500  800 
Net earnings attributable to Starbucks (adjusted) 3,609,700  4,555,900  2,971,900  2,817,700  2,757,900  2,068,900 

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

Starbucks Corp., Financial Data: Reported vs. Adjusted

Adjusted Financial Ratios: Removal of Goodwill (Summary)

Starbucks Corp., adjusted financial ratios

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Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
Net Profit Margin
Reported net profit margin 13.58% 18.28% 12.89% 13.22% 14.39% 12.57%
Adjusted net profit margin 13.62% 18.43% 13.28% 13.22% 14.39% 12.58%
Total Asset Turnover
Reported total asset turnover 1.38 1.02 1.56 1.49 1.54 1.53
Adjusted total asset turnover 1.69 1.20 1.75 1.69 1.76 1.66
Financial Leverage
Reported financial leverage — 20.66 2.64 2.44 2.14 2.04
Adjusted financial leverage — — 3.28 3.03 2.56 2.24
Return on Equity (ROE)
Reported ROE — 386.34% 52.93% 47.89% 47.39% 39.23%
Adjusted ROE — — 75.99% 67.66% 65.00% 46.85%
Return on Assets (ROA)
Reported ROA 18.73% 18.70% 20.08% 19.66% 22.15% 19.23%
Adjusted ROA 22.95% 22.10% 23.17% 22.35% 25.37% 20.90%

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

Financial ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Starbucks Corp.’s adjusted net profit margin ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Starbucks Corp.’s adjusted total asset turnover ratio deteriorated from 2017 to 2018 but then improved from 2018 to 2019 not reaching 2017 level.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Starbucks Corp.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 not reaching 2017 level.

Starbucks Corp., Financial Ratios: Reported vs. Adjusted

Adjusted Net Profit Margin

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Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings attributable to Starbucks 3,599,200  4,518,300  2,884,700  2,817,700  2,757,400  2,068,100 
Net revenues 26,508,600  24,719,500  22,386,800  21,315,900  19,162,700  16,447,800 
Profitability Ratio
Net profit margin1 13.58% 18.28% 12.89% 13.22% 14.39% 12.57%
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Adjusted net earnings attributable to Starbucks 3,609,700  4,555,900  2,971,900  2,817,700  2,757,900  2,068,900 
Net revenues 26,508,600  24,719,500  22,386,800  21,315,900  19,162,700  16,447,800 
Profitability Ratio
Adjusted net profit margin2 13.62% 18.43% 13.28% 13.22% 14.39% 12.58%

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

2019 Calculations

1 Net profit margin = 100 × Net earnings attributable to Starbucks ÷ Net revenues
= 100 × 3,599,200 ÷ 26,508,600 = 13.58%

2 Adjusted net profit margin = 100 × Adjusted net earnings attributable to Starbucks ÷ Net revenues
= 100 × 3,609,700 ÷ 26,508,600 = 13.62%

Profitability ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Starbucks Corp.’s adjusted net profit margin ratio improved from 2017 to 2018 but then slightly deteriorated from 2018 to 2019 not reaching 2017 level.

Adjusted Total Asset Turnover

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Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net revenues 26,508,600  24,719,500  22,386,800  21,315,900  19,162,700  16,447,800 
Total assets 19,219,600  24,156,400  14,365,600  14,329,500  12,446,100  10,752,900 
Activity Ratio
Total asset turnover1 1.38 1.02 1.56 1.49 1.54 1.53
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Net revenues 26,508,600  24,719,500  22,386,800  21,315,900  19,162,700  16,447,800 
Adjusted total assets 15,728,800  20,614,800  12,826,400  12,609,900  10,870,700  9,896,700 
Activity Ratio
Adjusted total asset turnover2 1.69 1.20 1.75 1.69 1.76 1.66

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

2019 Calculations

1 Total asset turnover = Net revenues ÷ Total assets
= 26,508,600 ÷ 19,219,600 = 1.38

2 Adjusted total asset turnover = Net revenues ÷ Adjusted total assets
= 26,508,600 ÷ 15,728,800 = 1.69

Activity ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Starbucks Corp.’s adjusted total asset turnover ratio deteriorated from 2017 to 2018 but then improved from 2018 to 2019 not reaching 2017 level.

Adjusted Financial Leverage

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Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
As Reported
Selected Financial Data (US$ in thousands)
Total assets 19,219,600  24,156,400  14,365,600  14,329,500  12,446,100  10,752,900 
Shareholders’ equity (deficit) (6,232,200) 1,169,500  5,450,100  5,884,000  5,818,000  5,272,000 
Solvency Ratio
Financial leverage1 — 20.66 2.64 2.44 2.14 2.04
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Adjusted total assets 15,728,800  20,614,800  12,826,400  12,609,900  10,870,700  9,896,700 
Adjusted shareholders’ equity (deficit) (9,723,000) (2,372,100) 3,910,900  4,164,400  4,242,600  4,415,800 
Solvency Ratio
Adjusted financial leverage2 — — 3.28 3.03 2.56 2.24

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

2019 Calculations

1 Financial leverage = Total assets ÷ Shareholders’ equity (deficit)
= 19,219,600 ÷ -6,232,200 = —

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted shareholders’ equity (deficit)
= 15,728,800 ÷ -9,723,000 = —

Solvency ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings attributable to Starbucks 3,599,200  4,518,300  2,884,700  2,817,700  2,757,400  2,068,100 
Shareholders’ equity (deficit) (6,232,200) 1,169,500  5,450,100  5,884,000  5,818,000  5,272,000 
Profitability Ratio
ROE1 — 386.34% 52.93% 47.89% 47.39% 39.23%
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Adjusted net earnings attributable to Starbucks 3,609,700  4,555,900  2,971,900  2,817,700  2,757,900  2,068,900 
Adjusted shareholders’ equity (deficit) (9,723,000) (2,372,100) 3,910,900  4,164,400  4,242,600  4,415,800 
Profitability Ratio
Adjusted ROE2 — — 75.99% 67.66% 65.00% 46.85%

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

2019 Calculations

1 ROE = 100 × Net earnings attributable to Starbucks ÷ Shareholders’ equity (deficit)
= 100 × 3,599,200 ÷ -6,232,200 = —

2 Adjusted ROE = 100 × Adjusted net earnings attributable to Starbucks ÷ Adjusted shareholders’ equity (deficit)
= 100 × 3,609,700 ÷ -9,723,000 = —

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Sep 29, 2019 Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014
As Reported
Selected Financial Data (US$ in thousands)
Net earnings attributable to Starbucks 3,599,200  4,518,300  2,884,700  2,817,700  2,757,400  2,068,100 
Total assets 19,219,600  24,156,400  14,365,600  14,329,500  12,446,100  10,752,900 
Profitability Ratio
ROA1 18.73% 18.70% 20.08% 19.66% 22.15% 19.23%
Adjusted for Goodwill
Selected Financial Data (US$ in thousands)
Adjusted net earnings attributable to Starbucks 3,609,700  4,555,900  2,971,900  2,817,700  2,757,900  2,068,900 
Adjusted total assets 15,728,800  20,614,800  12,826,400  12,609,900  10,870,700  9,896,700 
Profitability Ratio
Adjusted ROA2 22.95% 22.10% 23.17% 22.35% 25.37% 20.90%

Based on: 10-K (filing date: 2019-11-15), 10-K (filing date: 2018-11-16), 10-K (filing date: 2017-11-17), 10-K (filing date: 2016-11-18), 10-K (filing date: 2015-11-12), 10-K (filing date: 2014-11-14).

2019 Calculations

1 ROA = 100 × Net earnings attributable to Starbucks ÷ Total assets
= 100 × 3,599,200 ÷ 19,219,600 = 18.73%

2 Adjusted ROA = 100 × Adjusted net earnings attributable to Starbucks ÷ Adjusted total assets
= 100 × 3,609,700 ÷ 15,728,800 = 22.95%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Starbucks Corp.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 not reaching 2017 level.