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Non-Tech : Starbucks (SBUX) -- Ignore unavailable to you. Want to Upgrade?

To: SC who wrote (774)	7/2/1999 11:10:00 PM
From: Daniel Chisholm	Read Replies (1) \| Respond to of 1506

Sharp of you to notice that. In the answer to that question lies Starbucks secret -- how can they grow sales at 25%, 35% or 50% per year, even though they are a low ROE business? Shareholders' equity at 9/97 was $533,710K, and increased to $794,297K at 9/98, a gain of $260,587K (I am getting these figures from their 1998 10-K filing with the SEC). But their earnings during Fiscal Year (FY) 98 (ending 9/98) was only $68,372K -- where did the other $192,215K gain come from? The answer is, they sold stock. The secret is, they sold stock at a high price (much more than book value per share). Selling stock does two things to a balance sheet: It increases shareholder equity (the "paid in capital" entry), and increases the number of shares outstanding. If the shares are sold for more than the "book value per share" beforehand, then the "book value per share" increases as a result of the sale of such shares - in other words, the cash raised more than offsets the dilution caused by the issuance of new shares. This is said to be "antidilutive". In Starbucks' case, they sold shares three different ways. Go to this URL: freeedgar.com ... and access the "10-K Annual Report", filed 12/28/98. It's a pretty big document, but do a text search for "CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY", which will bring you up to a table that indicates how shareholders equity evolved through FY96, FY97 and FY98. During FY98, stock options for 1,417,264 shares were exercised, yielding proceeds to the company of $31,245,000 (average: about $22/share). 135,889 shares were sold for proceeds of $4,649,000 (about $34/share). And the biggest item of all, $162,036,000 worth of convertible debt was converted into 7,097,027 shares ($22.83/share). All told, during FY 1998 they increased shareholders equity by 197 million dollars through the sale of stock, and by a further 68 million dollars through earnings. It has been argued here in the past that Starbucks consistently makes more money through the sale of stock than through the sale of coffee, and should therefore perhaps be referred to as a stock-selling-company instead of a coffee-selling-company. This is Starbucks' magic. They sell moderate quantities (less than 10% per year) of very high priced stock. They've "created" far more shareholder value by selling stock than by selling coffee. In fact, their lifetime results as of 9/98 showed they had $589 million of value "created" though stock sales, compared to only $205 million created through coffee sales. If the "profits" from the sale of stock outnumber the profits from the sale of coffee by nearly a 3-to-1 margin, you tell me: What business is Starbucks in? - Daniel EDIT: why look at that grub-o-licious post number! Triple Sevens!