Coffee Inventory Management under LIFO at Farmer Brothers Coffee Company
James Amphlett, a financial analyst with Southern Cross LLC, has been asked to assess the financial performance of Farmer Brothers Company, a coffee manufacturer and distributor whose shares the equity firm was considering acquiring for its Growth Service portfolio. Amphlett’s research showed that the coffee business was volatile. Coffee prices had risen steadily from $0.20 per pound at the end of 2001 to over $1.20 per pound by the end of 2007, only to plunge to $0.70 per pound in March 2010, and rise again to over $1.26 by June 2011. The increase in coffee prices had taken a toll on Farmer Brothers’ bottom line. It had also taken a toll on Farmer Brothers’ stock price, as the company saw its stock price fall from over $24 per share in July 2008 to less than $6 per share by August 2011. Farmer Brothers valued inventory using the last-in-first-out, or LIFO method, whereas other coffee companies used FIFO; thus it was more difficult to make an apples-to-apples comparison of financial performance. Amphlett recalled that the LIFO accounting method was used primarily to save taxes as higher input prices were matched against revenues to reduce taxable earnings.
To analyze a company’s growth, its ability to generate cash flows, and its recent financial performance, and benchmark this performance against a peer company.
To evaluate the impact of company’s choice of LIFO vs. FIFO inventory method on a company’s financial performance.
Understand the LIFO year-end purchase decision on earnings, taxes, and cash flows.
To evaluate the intrinsic value of a company’s equity security relative to its current stock price.