Fiscal 2007 will be a big year for Starbucks. It will finally give New Yorkers warm breakfast sandwiches. It will move closer to making China its biggest market outside the U.S. It will take down a chain of hippie baristas.And, if reports by director of trading and operations Colman Cuff are to be believed, it will open 20% more stores than it has today; a whopping 2,400. While many of these will be in the U.S., a large number will be in China, where Starbucks Corporation (NASDAQ:SBUX) currently has only 400 stores.
Everyone seems to believe one eternal axiom of investing: growth is good. Certainly, revenue and profit growth will be good for Starbucks and I (as an exceedingly small investor), for one, can't complain about the short-term growth of the stock -- up 65 cents, or 1.76%, today on the news. And growth surely seems built into the price, at an exceedingly rich 53x earnings.
But growth can be too fast. Too careless. Too extravagant. Too 20%. In my analysis of the company's cash flows, it's somewhere between $250k and $300k to open a new Starbucks. Maybe that's not outrageous? But it's not cheap. When I see these huge numbers all stacking up together, I want to be very worried.
But here's the thing: Starbucks can totally swing it. With operations that are churning cash and a long-term debt:asset ratio that's so small (at 1%-ish) it's a rounding error, what else should the company do, but grow? As long as customers keep coming into those new stores (they are), as long as the expense isn't imperiling the company's assets (it's not), as long as people keep drinking coffee that costs 20% of its retail price:
Keep on growin', Starbucks.
Keep on growin', Starbucks.
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Reader Comments (Page 1 of 1)
11-14-2006 @ 7:15AM
Michael Schneider said...
It;s probably a good move to expand fast- one way to fwnd off competition is to get there first and get the best locations. The China move is getting more important for them. If they falter in China that would be bad news for the stock, If they are successful, they will make a lot of money there.