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Wendy's International Inc Financial Analysis

Essay by   •  November 1, 2010  •  Case Study  •  3,574 Words (15 Pages)  •  3,860 Views

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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 StatesÐŽ]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. ÐŽ]Smart money, 2004ÐŽ^

In this financial analysis report, I will compare and contrast these two companiesÐŽ¦ 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 Ñžâ„-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 WendyÐŽ¦s are excellent companies to earn a lot of profit in this industry.

Return on sales (ROS): Harrington (2004) said that ÐŽ§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 WendyÐŽ¦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 WendyÐŽ¦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 WendyÐŽ¦s, Starbucks uses the strategy that lowering the sales price normally increases unit volume. The result is the profit margins lower than WendyÐŽ¦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 ÐŽ§smart moneyЎЁ website. For WendyÐŽ¦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 ÐŽ§Yahoo FinanceЎЁ website.

Chart 2 shows that Starbucks has a lower gross margin than WendyÐŽ¦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 WendyÐŽ¦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 WendyÐŽ¦s, its gross margin almost was close to the industry rate of 2003. The cost for goods sold of WendyÐŽ¦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 ÐŽ§smart moneyЎЁ website, I got two companiesÐŽ¦ EBIT for 5 years. EBIT stands for earnings before interest and taxes (Harrington, 2004). The industry ratio is from ÐŽ§Yahoo FinanceЎЁ website.

According to chart 3, WendyÐŽ¦s always keep a level that produces and markets its goods profitably. The ratios from 5 years all were higher than the industry level. Although Starbucks had a very high gross margin in 2003, it did not have high EBIT/Sales in 2003. The reason is when it increased the sales, the operating expense and nonoperating expenses also increased for opening 602 new stores. (EBIT= revenues ÐŽV cost of goods sold ÐŽV operating expenses ÐŽV nonoperating expenses, gross margin= revenues ÐŽV cost of goods sold)

Chart 3

Asset Utilization Ratios

This main focus of this part will be on assets. Most companies need assets to produce sales revenues and ultimately, profits. Asset utilization ratios indicate how effectively or efficiently a company uses its assets (Harrington, 2004).

TATO: Total asset turnover is used to indicate a companyÐŽ¦s degree of operating leverage (Harrington, 2004). For calculating this ratio, I used total asset of Starbucks and WendyÐŽ¦s which is reported in their annual balance sheet.

As Chart 4 imply, both Starbucks and WendyÐŽ¦s have used the assets effectively and efficiently based on the TATO are over 100%. Their net sales are more than the total assets in the balance sheet. However, this ratio depends on the different industries such as capital intensity and labor intensity. Starbucks and WendyÐŽ¦s are both labor intensity company. They are quite asset efficient, because their products are produced with a high level of labor and relatively little capital investment (Harrington, 2004). Apparently, Starbucks is better than WendyÐŽ¦s in this ratio every year.

Chart 4

Payables payment period: This ratio is related to the efficiency with which the company manages its short-term liabilities,

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