Open mouth, insert foot.



Just a couple of weeks ago, I opined that Starbucks' (Nasdaq: SBUX) aggressive plan to add stores over the long haul was a good thing.

But that was then, and this is now.

In fact, some more details are starting to come out about management's aggressive growth plans, and I'm not sure I like what I'm hearing.

According to Starbucks' chairman Howard Schultz, the company expects to open at least 10,000 stores over the next four years.

Folks that's worrisome to say the least.

Why Worry?
There are a couple of reasons. First, it's taken Starbucks what, like 20 years to open just over 13,000 locations? And now in just 4 short years it's going to almost double in size?

Frankly, I think that there could be a couple of problems with that equation. Seriously, what happens if:

• The economy slows during this growth phase and the company is stuck in some lousy leases?

• Existing same store sales start to wane? After all, it costs a lot of money to secure new leases and start up new locations. That dough is going to have to come from somewhere.

• Large dilutive financings will be needed to finance these locations?

You see, when I penned my last article I was aware that management had said that its goal over the long haul was to have 40,000 stores under its belt. But 10,000 in the next couple of years?

I can feel my blood pressure rising just thinking about it!

An Example of What Can Happen if a Company Grows Too Fast
The one company that comes to mind when I think about "hyper growth" such as this is a company called Manhattan Bagel. Do you remember those guys? They still exist, although primarily in the northeast -- and under different ownership. Well anyway, back in the mid 1990s before the whole "low carb" thing, they were all the rage.

I remember it like it was yesterday -- the company was opening stores left and right. It made a huge west coast acquisition. Wall Street thought the company couldn't be stopped. In some circles comparisons were already being made with McDonald's (NYSE: MCD), and Yum! Brands (NYSE: YUM).

Then the problems began. The company was having some issues financing its growth. In fact, it had serious problems.

Long story short, in spite of the exponential growth in its store base each year, it was losing money. It was ultimately forced to close a number of stores in order to stay afloat. But it was too little too late. Its shareholders essentially got nothing as the chain filed for bankruptcy protection in November of 1997. (For the record, under new ownership the stores are much better run.)

Now I'm not suggesting that Starbucks and Manhattan Bagel are in the same boat. In fact, I think that Starbucks has a solid management team, and it certainly has a longer operating history and deeper pockets then Manhattan Bagel ever had.

But again, I just can't get that story out of my mind. To this day I think back to that example of how hyper growth and a "sure thing" can go bad real fast. For the record, I got burned on that one -- personally. And I mean big time.

The good news is that my loss taught me a lesson. To be wary of companies that want to grow at a break neck clip.




What Starbucks Needs To Do
Anyway, I think that management at Starbucks will need to clarify how it plans to finance that growth as well as what metrics should be used to gauge the success of new store openings. I also think that management will need to prove to investors that the company can show solid same store sales growth, and can generate meaningful profits (even while taking on such a huge financial burden) before I wholeheartedly buy into this new fangled plan. After all saying you plan to double in size is one thing. Doing it is another thing altogether.

Again, prove to me it's doable.

The Bottom Line
I'm still bullish on Starbucks because I think it's a great concept. But with hyper growth comes enormous risk, and investors need to be fully aware of that.

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Tickers in this Article: SBUX, MCD, YUM

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