Microsoft Excel LibreOffice Calc

Starbucks Corp. (SBUX)

Analysis of Goodwill and Intangible Assets

Difficulty: Advanced

Goodwill and Intangible Assets Accounting Policy

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.

For goodwill related to the Switzerland retail reporting unit, Starbucks initially recorded an impairment charge of $17.9 million in the third quarter of fiscal 2017. This was primarily due to the impacts of the strength of the Swiss franc, continued shift of consumer behaviors to neighboring countries and the relocations of certain businesses sustaining beyond Starbucks’ projections and indicating the reporting unit’s carrying value would not be fully recovered. Since then, the operational investments and improvements Starbucks made did not sufficiently slow the performance decline, and Starbucks recorded impairment charges of $37.6 million for the remaining Switzerland goodwill balance during fiscal 2018.

As noted above, if store closures are indicative of potential impairment of goodwill at the reporting unit level, Starbucks performs an evaluation of the reporting unit goodwill when such closures occur. Due to the strategic decision to close Teavana branded retail stores and the subsequent review of this reporting unit’s fair value, Starbucks recorded goodwill impairment charges of $69.3 million during the third quarter of fiscal 2017.

There were no material goodwill impairment charges recorded during fiscal 2016.

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 2018, 2017, and 2016.

Source: 10-K (filing date: 2018-11-16).

Goodwill and Intangible Assets Disclosure

Starbucks Corp., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in thousands

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Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
Acquired and reacquired rights 1,081,700  328,800  361,300  308,600  36,800  38,800 
Acquired trade secrets and processes 27,600  27,600  27,600  27,600  27,600  27,600 
Trade names, trademarks and patents 33,000  31,500  29,400  24,500  21,600  19,500 
Licensing agreements 14,300  14,400  16,000  13,400  –  – 
Other finite-lived intangible assets 25,600  6,700  7,200  6,500  3,800  3,800 
Finite-lived intangible assets, gross carrying amount 1,182,200  409,000  441,500  380,600  89,800  89,700 
Accumulated amortization (371,000) (194,800) (148,100) (78,100) (28,900) (20,500)
Finite-lived intangible assets, net carrying amount 811,200  214,200  293,400  302,500  60,900  69,200 
Trade names, trademarks and patents 215,900  212,100  207,800  202,800  197,500  190,500 
Other indefinite-lived intangible assets 15,100  15,100  15,100  15,100  15,100  15,100 
Indefinite-lived intangible assets 231,000  227,200  222,900  217,900  212,600  205,600 
Other intangible assets 1,042,200  441,400  516,300  520,400  273,500  274,800 
Goodwill 3,541,600  1,539,200  1,719,600  1,575,400  856,200  862,900 
Other intangible assets and goodwill 4,583,800  1,980,600  2,235,900  2,095,800  1,129,700  1,137,700 

Based on: 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), 10-K (filing date: 2013-11-18).

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 declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.
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 declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.
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 declined from 2016 to 2017 but then increased from 2017 to 2018 exceeding 2016 level.

Analyst Adjustments: Removal of Goodwill

Starbucks Corp., adjustments to financial data

USD $ in thousands

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Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
Adjustment to Total Assets
Total assets (as reported) 24,156,400  14,365,600  14,329,500  12,446,100  10,752,900  11,516,700 
Less: Goodwill 3,541,600  1,539,200  1,719,600  1,575,400  856,200  862,900 
Total assets (adjusted) 20,614,800  12,826,400  12,609,900  10,870,700  9,896,700  10,653,800 
Adjustment to Shareholders’ Equity
Shareholders’ equity (as reported) 1,169,500  5,450,100  5,884,000  5,818,000  5,272,000  4,480,200 
Less: Goodwill 3,541,600  1,539,200  1,719,600  1,575,400  856,200  862,900 
Shareholders’ equity (adjusted) (2,372,100) 3,910,900  4,164,400  4,242,600  4,415,800  3,617,300 
Adjustment to Net Earnings Attributable To Starbucks
Net earnings attributable to Starbucks (as reported) 4,518,300  2,884,700  2,817,700  2,757,400  2,068,100  8,300 
Add: Goodwill impairment 37,600  87,200  –  500  800  – 
Net earnings attributable to Starbucks (adjusted) 4,555,900  2,971,900  2,817,700  2,757,900  2,068,900  8,300 

Based on: 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), 10-K (filing date: 2013-11-18).

Starbucks Corp., Financial Data: Reported vs. Adjusted

Adjusted Ratios: Removal of Goodwill (Summary)

Starbucks Corp., adjusted ratios

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Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
Net Profit Margin
Reported net profit margin 18.28% 12.89% 13.22% 14.39% 12.57% 0.06%
Adjusted net profit margin 18.43% 13.28% 13.22% 14.39% 12.58% 0.06%
Total Asset Turnover
Reported total asset turnover 1.02 1.56 1.49 1.54 1.53 1.29
Adjusted total asset turnover 1.20 1.75 1.69 1.76 1.66 1.40
Financial Leverage
Reported financial leverage 20.66 2.64 2.44 2.14 2.04 2.57
Adjusted financial leverage – 3.28 3.03 2.56 2.24 2.95
Return on Equity (ROE)
Reported ROE 386.34% 52.93% 47.89% 47.39% 39.23% 0.19%
Adjusted ROE – 75.99% 67.66% 65.00% 46.85% 0.23%
Return on Assets (ROA)
Reported ROA 18.70% 20.08% 19.66% 22.15% 19.23% 0.07%
Adjusted ROA 22.10% 23.17% 22.35% 25.37% 20.90% 0.08%

Based on: 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), 10-K (filing date: 2013-11-18).

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 improved from 2016 to 2017 and from 2017 to 2018.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Starbucks Corp.’s adjusted total asset turnover improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.
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.		 Starbucks Corp.’s adjusted financial leverage increased from 2016 to 2017 but then declined significantly from 2017 to 2018.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Starbucks Corp.’s adjusted ROE improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Starbucks Corp.’s adjusted ROA improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.

Starbucks Corp., Ratios: Reported vs. Adjusted

Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net earnings attributable to Starbucks 4,518,300  2,884,700  2,817,700  2,757,400  2,068,100  8,300 
Net revenues 24,719,500  22,386,800  21,315,900  19,162,700  16,447,800  14,892,200 
Ratio
Net profit margin1 18.28% 12.89% 13.22% 14.39% 12.57% 0.06%
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Adjusted net earnings attributable to Starbucks 4,555,900  2,971,900  2,817,700  2,757,900  2,068,900  8,300 
Net revenues 24,719,500  22,386,800  21,315,900  19,162,700  16,447,800  14,892,200 
Ratio
Adjusted net profit margin2 18.43% 13.28% 13.22% 14.39% 12.58% 0.06%

Based on: 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), 10-K (filing date: 2013-11-18).

2018 Calculations

1 Net profit margin = 100 × Net earnings attributable to Starbucks ÷ Net revenues
= 100 × 4,518,300 ÷ 24,719,500 = 18.28%

2 Adjusted net profit margin = 100 × Adjusted net earnings attributable to Starbucks ÷ Net revenues
= 100 × 4,555,900 ÷ 24,719,500 = 18.43%

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 improved from 2016 to 2017 and from 2017 to 2018.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net revenues 24,719,500  22,386,800  21,315,900  19,162,700  16,447,800  14,892,200 
Total assets 24,156,400  14,365,600  14,329,500  12,446,100  10,752,900  11,516,700 
Ratio
Total asset turnover1 1.02 1.56 1.49 1.54 1.53 1.29
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Net revenues 24,719,500  22,386,800  21,315,900  19,162,700  16,447,800  14,892,200 
Adjusted total assets 20,614,800  12,826,400  12,609,900  10,870,700  9,896,700  10,653,800 
Ratio
Adjusted total asset turnover2 1.20 1.75 1.69 1.76 1.66 1.40

Based on: 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), 10-K (filing date: 2013-11-18).

2018 Calculations

1 Total asset turnover = Net revenues ÷ Total assets
= 24,719,500 ÷ 24,156,400 = 1.02

2 Adjusted total asset turnover = Net revenues ÷ Adjusted total assets
= 24,719,500 ÷ 20,614,800 = 1.20

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 improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.

Adjusted Financial Leverage

Microsoft Excel LibreOffice Calc
Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Total assets 24,156,400  14,365,600  14,329,500  12,446,100  10,752,900  11,516,700 
Shareholders’ equity 1,169,500  5,450,100  5,884,000  5,818,000  5,272,000  4,480,200 
Ratio
Financial leverage1 20.66 2.64 2.44 2.14 2.04 2.57
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Adjusted total assets 20,614,800  12,826,400  12,609,900  10,870,700  9,896,700  10,653,800 
Adjusted shareholders’ equity (2,372,100) 3,910,900  4,164,400  4,242,600  4,415,800  3,617,300 
Ratio
Adjusted financial leverage2 – 3.28 3.03 2.56 2.24 2.95

Based on: 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), 10-K (filing date: 2013-11-18).

2018 Calculations

1 Financial leverage = Total assets ÷ Shareholders’ equity
= 24,156,400 ÷ 1,169,500 = 20.66

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted shareholders’ equity
= 20,614,800 ÷ -2,372,100 = –

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.		 Starbucks Corp.’s adjusted financial leverage increased from 2016 to 2017 but then declined significantly from 2017 to 2018.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net earnings attributable to Starbucks 4,518,300  2,884,700  2,817,700  2,757,400  2,068,100  8,300 
Shareholders’ equity 1,169,500  5,450,100  5,884,000  5,818,000  5,272,000  4,480,200 
Ratio
ROE1 386.34% 52.93% 47.89% 47.39% 39.23% 0.19%
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Adjusted net earnings attributable to Starbucks 4,555,900  2,971,900  2,817,700  2,757,900  2,068,900  8,300 
Adjusted shareholders’ equity (2,372,100) 3,910,900  4,164,400  4,242,600  4,415,800  3,617,300 
Ratio
Adjusted ROE2 – 75.99% 67.66% 65.00% 46.85% 0.23%

Based on: 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), 10-K (filing date: 2013-11-18).

2018 Calculations

1 ROE = 100 × Net earnings attributable to Starbucks ÷ Shareholders’ equity
= 100 × 4,518,300 ÷ 1,169,500 = 386.34%

2 Adjusted ROE = 100 × Adjusted net earnings attributable to Starbucks ÷ Adjusted shareholders’ equity
= 100 × 4,555,900 ÷ -2,372,100 = –

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity. Starbucks Corp.’s adjusted ROE improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Sep 30, 2018 Oct 1, 2017 Oct 2, 2016 Sep 27, 2015 Sep 28, 2014 Sep 29, 2013
As Reported
Selected Financial Data (USD $ in thousands)
Net earnings attributable to Starbucks 4,518,300  2,884,700  2,817,700  2,757,400  2,068,100  8,300 
Total assets 24,156,400  14,365,600  14,329,500  12,446,100  10,752,900  11,516,700 
Ratio
ROA1 18.70% 20.08% 19.66% 22.15% 19.23% 0.07%
Adjusted for Goodwill
Selected Financial Data (USD $ in thousands)
Adjusted net earnings attributable to Starbucks 4,555,900  2,971,900  2,817,700  2,757,900  2,068,900  8,300 
Adjusted total assets 20,614,800  12,826,400  12,609,900  10,870,700  9,896,700  10,653,800 
Ratio
Adjusted ROA2 22.10% 23.17% 22.35% 25.37% 20.90% 0.08%

Based on: 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), 10-K (filing date: 2013-11-18).

2018 Calculations

1 ROA = 100 × Net earnings attributable to Starbucks ÷ Total assets
= 100 × 4,518,300 ÷ 24,156,400 = 18.70%

2 Adjusted ROA = 100 × Adjusted net earnings attributable to Starbucks ÷ Adjusted total assets
= 100 × 4,555,900 ÷ 20,614,800 = 22.10%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Starbucks Corp.’s adjusted ROA improved from 2016 to 2017 but then deteriorated significantly from 2017 to 2018.