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Tickers in this Article: DSW, SSI, ANN, CHS, WMK
A recent academic paper has finally answered the question that has been in my mind for years: Why are publicly traded companies so obsessed with sales growth? I have always considered it a better long-term strategy to grow slower or not at all if it means a company would instead be profitable. Yet I have watched in awe as companies grow themselves out of existence.

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The paper is entitled "Growth vs. Margins: Destabilizing Consequences Of Giving The Stock Market What It Wants," written by Philippe Aghion and Jeremy Stein, two professors in the Harvard University Economics Department. The authors conclude, as can be guessed from the title, that some companies cater to the market's whims and pursue the higher-growth strategy. This can also lead to excessive volatility in the stock price. Here, I will add my own corollary to the paper: When companies pursue this higher growth to the extreme, it will lead to excessive debt and negative free cash flow.

Companies Just Keep The Growth Machine Churning
The current recession and credit crunch give us many examples of companies so used to growing, and so unwilling to disappoint investors, that they keep the growth machine churning.

DSW (NYSE:DSW) reported a loss of $7.5 million for is most recent quarter, with comparable same-store sales (comps) down 7.2%. Despite this loss and fall in sales, the company will open 10 new stores in 2009. I suppose that management should be credited with cutting new store growth from the 41 opened in 2008, but perhaps it's time to pause and find out why sales are falling before growing the store base. (Learn more in Analyzing Retail Stocks.)

Stage Stores (NYSE:SSI) saw a 12.2% decline in comps in its Q1 through April 4. The company plans eight new stores in April alone. Maybe some retailers see the decline in sales as a symptom of the larger recession, rather than anything wrong with their fashion offerings or store format, but what harm could there be in re-evaluating and putting the growth on hold for a quarter?

Ann Taylor (NYSE:ANN) announced a three-year restructuring plan to cut costs and rationalize its store base in January 2008. The deepening recession forced the company to expand the store closure component to 163 stores - up from the 117 previously believed to be closed.

Like many other retailers, Chico's FAS (NYSE:CHS) has also been suffering from losses and declining sales in the past year. However, the company actually saw a net decline in its total stores in Q4 of fiscal 2008 when it closed 13 stores while opening 6. Chico's disclosed during its conference call that it would cut its square footage growth to only 1% in the current fiscal year.

Some Companies Don't Give A Hoot About Growth
Weis Markets (NYSE:WMK) operates 155 grocery stores in five states in the Northeast. The company store base has basically remained flat for five years, yet it has remained profitable and debt-free through the recession.

Bottom Line: Think Long Term
It seems that some publicly traded companies pursue unsustainable growth because they are responding to what investors in the market are demanding as a measure of performance. Maybe it's time they listened to long-term value investors instead.

Dig deeper into the debate over a company's responsibilities in Whom Should Corporations Please?

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