Last updated: July 23, 2019
Topic: BusinessCompany
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Company Analysis – Coffee Republic Plc

 

Background of the Company

 

Formed in the year 1995 Coffee Republic grew to be a leading brand in the UK coffee market, and received a wide consumer recognition and acclaim in the in the national newspapers and in other market survey conducted by independent research surveys. (Coffee Republic) Coffee Republic Plc is based in UK engaged in the operation of specialty espresso and deli bars. The company operates directly and also through franchisees. The company had 40 company operated outlets and 5 franchise operated coffee bars in the UK as of April 2007. Coffee Republic (UK) Limited, Goodbean Limited, and Republic Deli Limited are some of the subsidiaries of Coffee Republic Limited. (Google Finance) The company’s main competitors are Caffe Nero, Whitbread and Starbucks.

Strategic Changes in the Operations of the Company

 

Coffee Republic, the coffee chain founded by Bobby Hashemi and his sister was originally depending more on its own bars. The company changed its strategy and started rolling out more franchise at the end of 2005. The company is trying to expand through its deli concept offering fresh sandwiches in addition to the coffee on the locations with a view to cut the competition from the rivals Starbucks, Costa Coffee and Caffe Nero. The market value of the shares of the company went up by 20 percent around mid October 2006 after the news that the there is a change in the management with co-founder Hashemi stepping down to give room for a new CEO and Chairman. (Flex News) “The introduction of the new Deli format totally sets Coffee Republic apart from other coffee bars, cafes and restaurants and best of all, converted units have seen an average turnover increase of more than 25%.” (Which Franchise)

Thus Coffee Republic planned to refit all its existing trading locations to its new and highly successful Coffee Republic deli format with the proposal to have almost 100 outlets worldwide within the end of December 2007 and is contemplating to increase the number of outlets by at least 50 each year in the next few years. (Property Executive)

Financial Performance of Coffee Republic Limited

 

Despite the abysmal financial performance for the fiscal year ending 30th April 2007 an analysis of which is produced below, the strategy of the company continues to be the roll out of the deli concept mainly through franchising. The company’s experience in this respect so far has been a strong interest from the market for franchising the ‘Coffee Republic’ brand and the company’s prospects appear to be bright in the wake of the volume and quality of the prospective franchisees.

The company’s profitability has been extremely poor in both the years 2006 and 2007.

A close look at the balance sheet of the company exhibits the following:

 

Balance Sheet (at a glance)

 

 

 

Source: Advfn Financials

<http://www.advfn.com/p.php?pid=ukfinancials&symbol=LSE%3ACFE>

 

In view of the poor financial performance the company’s stock value has been declining from the beginning of the year 2007, which is graphically represented below:

 

 

Coffee Republic Historical Stock Chart

 

An analysis of the financial performance by calculating the key financial ratios is appended below:

 

Profitability Ratios

 

“Profitability ratios offer several different measures of the success of the firm at generating profits.” (Net MBA)

 

 

Ratios
Coffee Republic Plc

Year 2007
Coffee Republic Plc

Year 2006
Star bucks

Year 2007
Star bucks

Year 2006
Gross Profit Margin
(14.68%)
(7.81%)
23.34%
24.63%
Net Profit Margin
(23.00%)
(7.89%)
12.37%
13.00%
Return on Capital Employed ROCE
(26.17%)
(16.19%)
21.79%
22.86%
Sales for the year fell by 34.83% to £ 9.7 million (2006: £ 14.9 million) due to the panned closure of non-core bars and change in strategy to roll out more franchise outlets. Even though the roll out of franchise program started off towards the end of the year 2005 the company has not made significant progress in this direction to reflect more sales turnover. As far as the profitability of the company is concerned the company has returned a net operating loss of 23.00% (2006: 7.89%) which has eroded the equity of the company. The company could not even make any gross profit which implies that the company is accumulating cash losses and will not reflect well in the eyes of the analysts and the investors. The company has to take drastic steps to improve the profitability. The company is showing a negative ROCE of 26.17% (2006: 16.19%) This percentage again implies that the capital of the company is being used to fund the losses the company accumulates in the operations.

A comparison of the profitability of the rival competitor Starbucks shows the success of the company in terms of its profitability both at the gross profit level and at the net profit level. Starbucks has earned a return on capital employed at 21.79% for the year 2007 and 22.86% for the year 2006

 

Working Capital Ratios

 

“The asset management ratios are also known as working capital ratios or the efficiency ratios. The aim is to measure how effectively the firm is managing its assets.” (Net Tom)

 

Ratios
Coffee Republic Plc

Year 2007
Coffee Republic Plc

Year 2006
Star bucks

Year 2007
Star bucks

Year 2006
Stock Days
1.60 days
1.82 days
35 days
40 days
Debtor Days
21 days
3.56 days
14.56 days
13.95 days
In the area of working capital the stock levels of the company is so poor. This is again understandable from the change in strategy of the company to move towards deli style franchise outputs in the place of own outlets. But the time taken by the company to implement the strategic changes has gone beyond the time limits which show off in the number of stock days. However, the company’s results for the year show higher debtors days of 21 (for the year 2006 it was only 3.56) which is very high for the sector in which the company is operating. The collectability of these debts also needs to be looked into. The change in the number of debtors days is considerably high when compared to the figure in 2006. The comparative values for the competitor Starbucks are also shown in the table for comparison.

 

Liquidity Ratios

 

Liquidity ratio is defined “as a class of financial metrics that is used to determine a company’s ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger is the margin of safety that the company possesses to cover short-term debts.” (Investopedia)

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Ratios
Coffee Republic Plc

Year 2007
Coffee Republic Plc

Year 2006
Star bucks

Year 2007
Star bucks

Year 2006
Current Ratio
0.57
0.48
0.78
0.79
Quick Ratio
0.56
0.46
0.46
0.46
The current ratio for the company is also not that impressive. Normally a current ratio of 2 is being advocated for a company to be in a healthy liquidity positions. Again this number will vary from industry to industry depending on the maintenance of current liabilities in the form of trade creditors. Especially in the case of companies like Coffee Republic or Starbucks which deal in food items the current liability may remain high as they may buy their supplies more on credit and make their sales in cash thus maintaining high current liabilities. Still on comparison with the competitor the current ratio and quick ratio of Coffee Republic is on the lower side at 0.57 as compared to 0.78 for Starbucks for the year 2007 in respect of the current ratio. However the quick ratio shows a somewhat better ratio and this is because Coffee Republic is having high debtor content in the current assets.

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Long-Term Solvency Ratios

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“Long-term solvency focuses on a firm’s ability to pay the interest and principal on its long-term debt. There are two commonly used ratios relating to servicing long-term debt. One measures ability to pay interest, the other the ability to repay the principal.” (Free Tutorial)

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Ratios
Coffee Republic Plc

Year 2007
Coffee Republic Plc

Year 2006
Star bucks

Year 2007
Star bucks

Year 2006
Gearing Ratio
26.09%
29.44%
10.29%
0.04%
Dividend Cover
0
0
1.04
1.08
Shareholders’ Equity
(732)
539

In respect of the long-term solvency, although the gearing ratio for Coffee Republic shows 26.09% it can be considered as historical on the basis of the capital and reserves the company was holding before. But with the accumulated losses of £ 7,037 million for the year 2007 (£ 4,590 million for the year 2006) the company’s equity has reached a negative value of £ 732 millions implying that the entire equity of the shareholders have been eroded and the company is struggling under sever debt position. With one more year of this kind of operation the company may not be in a position to repay the long term debts and current liabilities. The position for the year 2006 still appears to be better with a positive equity value of £ 539 million.

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Competitive Advantage

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Apart from the financial performance as depicted by the key financial ratios calculated out of the financial statements and reports produced by the company for the information of the public, the companies are usually assessed on the basis of the business model they follow and how effectively these models are able to translate the company’s capabilities into strong and sustainable competitive advantage. This is possible to achieve with a conscious reduction in the cost of activities of the company and doing something different from the competitors. This differentiation should also have the quality of adding value to the customers who will then be convinced to pay a premium price for the products of the company. In this respect the Starbucks has been able to distinguish itself from the competitors and is clearly evidenced by its roaring success. The ability of Coffee Republic in promoting its business in the New York style deli style is yet to be seen in turning itself around.(Company Eye Ranking)

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Other Factors for Consideration

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The other factors that need to be considered in assessing the performance of any business include the following:

Competition in general and the intensity thereof to protect new entrants to the industry and the market. This is possible by the differentiation Coffee Republic would be able to offer to the customers through its unique quality and competitive prices. The company should be able to establish its own unique selling points which distinguish the company from the competitors.
The company should be able to hold on to its customers so that the revenue stream of the company remains study without any high fluctuations. It is important that the customers of Coffee Republic are not just one-off customers and that the company is able maximise the revenues by the frequent repeat visits of the customers.
The company should be able to achieve considerable cost reduction in its activities so that the bottom line of the company gets enhanced.
The management of the company is another area Coffee Republic has to prove with the changed management and leadership. Good corporate governance is at the root of the success of the company. The quality of the management and the stakes of the directors in the company are certain other factors which need consideration in assessing the performance of any business. With the change in the top management after the stepping down of the co-founder in Coffee Republic considerable strategic changes have been introduced in the functioning of the company by the new leadership. The effect of these changes might take sometime before it starts giving results in the positive direction.
After all the product of the company should be a superior one adding value to the customer and distinctly appealing to the customer which is able to establish a strong brand for Coffee Republic. Again Starbucks is the fitting example in the context who has carved a niche foe its products.
Risk factor and growth prospects are some other elements which go to increase the value of any company. In the case of Coffee Republic one cannot eliminate the risk element in the present day context; but the growth prospects for the company appear to be on a strong side. Despite a consideration of all these factors, from an investment in the stocks of Coffee Republic Plc perspective the views of intelligent analysts should be taken into account before any investment decision is taken. (Company Eye Ranking)
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APPENDIX

Calculation of Various Key Financial Ratios

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PROFITABILITY RATIOS

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Particulars
Coffee Republic

Year 2007 £ ‘000
Coffee Republic

Year 2006 £ ‘000
Star Bucks Year 2007
Star Bucks Year 2006
Gross Profit
(1427)
(1165)
2196.48
1920.34
Sales
9719
14914
9411.50
7786.94
Gross Profit Ratio
(14.68%)
(7.81%)
23.34%
24.63%
Net Profit (PBIT)
(2235)
(1177)
1164.37
1012.47
Sales
9719
14914
9411.50
7786.94
Net Profit Ratio
(23.00%)
(7.89%)
12.37%
13.00%
PBIT
(2235)
(1177)
1164.37
1012.47
Capital Employed
8531
7269
5343.88
4428.94
Return on capital Employed
(26.17%)
(16.19%)
21.79%
22.86%
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WORKING CAPITAL RATIOS

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Particulars
Coffee Republic

Year 2007 £ ‘000
Coffee Republic

Year 2006 £ ‘000
Star Bucks Year 2007
Star Bucks Year 2006
Stock
47
77
691.66
636.22
Cost of Sales
10751
15454
7215.01
5866.61
Stock Days
1.60 days
1.82 days
35 days
40 days
Debtors
619
151
287.93
224.27
Cost of Sales
10751
15454
7215.01
5866.61
Debtors Days
21 days
3.56 days
14.56 days
13.95 days
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LIQUIDITY RATIOS

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Particulars
Coffee Republic

Year 2007 £ ‘000
Coffee Republic

Year 2006 £ ‘000
Star Bucks Year 2007
Star Bucks Year 2006
Current Assets
1619
1430
1696.49
1529.79
Current Liabilities
2819
2943
2155.57
1935.62
Current Ratio
0.57
0.48
0.78
0.79
Current Assets  – Stock
1572
1353
1004.83
893.57
Current Liabilities
2819
2943
2155.57
1935.62
Quick Ratio
0.56
0.46
0.46
0.46
LONG – TERM SOLVENCY RATIOS

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Particulars
Coffee Republic

Year 2007 £ ‘000
Coffee Republic

Year 2006 £ ‘000
Star Bucks Year 2007
Star Bucks Year 2006
Long Term Liability
2226
2140
550.12
1.96
Capital Employed
8531
7269
5343.88
4428.94
Gearing Ratio
26.09%
29.44%
10.29%
0.04%
PBIT
(2235)
(1177)
1164.37
1012.47
Interest Payable
212
269

Interest Cover

Profit After Tax
(2447)
(1446)
672.64
581.47
Dividend
0
0
642.06
537.47
Dividend Cover
0
0
1.04
1.08
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1.0PROFITABILITY:

1.1 Gross profit Margin

Gross profit  * 100

Sales

1.2  Net profit Margin

P.B.I.T  * 100

Sales

1.3  Return on capital employed (R.O.C.E):

P.B.I.T  *  100

Capital Employed

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P.B.I.T = Finance income + operating profit + Share of post tax of joint ventures

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Capital employed = (L/T Liability + Shareholders funds)  or (share

capital + reserves + long term debt)

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2.0WORKING CAPITAL POSITION:

2.1   Stock Days:

Stock            *  365

Cost of sales

2.2   Debtor Days:

Trade Debtors    *  365

Cost of Sales (Credit Turnover)

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3.0LIQUIDITY:

3.1  Current Ratio:

Current Assets

Current Liabilities

3.2  Quick Ratio:

Current Assets – Stock

Current Liabilities

4.0 LONG TERM SOLVENCY:

4.1 Gearing Ratio

L/T Liab       *  100

Capital Emp

4.2  Interest Cover

P.B.I.T

Interest Payable

(In the absence of break up of interest paid and interest income earned in the

case of Starbucks this ratio could not be calculated)

4.3  Dividend Cover

Profit after tax

Dividend

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References:

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Coffee Republic Home ;http://www.coffeerepublic.co.uk/;

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Company Eye Ranking ‘Coffee Republic Plc (LSE – CFE)
;http://www.aimquoted.com/companyinfo/Coffee%20Republic%20PLCoct.pdf.;

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Flex News ‘UK: Coffee Republic Shares +20% as Founder Exits (DJ)’

;http://www.flexnews.com/pages/5350/Coffee/UK/uk_coffee_republic_shares_+20_founder_exits_dj.html;

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Free Tutorial ‘How to analyse Financial Statements’

;http://www.e-articles.info/e/a/title/HOW-TO-ANALYZE-FINANCIAL-STATEMENTS/;

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Google Finance ‘Coffee Republic Plc”

;http://finance.google.com/finance?q=LON:CFE;

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Investopedia ‘Liquidity Ratios’

;http://www.investopedia.com/terms/l/liquidityratios.asp;

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Net MBA ‘Financial Ratios’

;http://www.netmba.com/finance/financial/ratios/;

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Net Tom ‘Session 14: Calculation of Ratio Analysis’

;http://cbdd.wsu.edu/kewlcontent/cdoutput/TOM505/page25.htm;

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Property Executive ‘Coffee Republic Appoint Leslie Furness for Major Expansion Plans’ ;http://www.propertyexecutive.co.uk/2007/10/coffee-republic-appoint-leslie-furness.html;

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Which Franchise ‘Coffee Republic UK Franchise’

;http://www.whichfranchise.com/franchisorPage.cfm?CompanyID=2482;

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www.Starbucks.com