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Is Starbucks Growing Too Quickly?

If you think you know all there is to know about Starbucks (NASDAQ: SBUX  ) , you're probably wrong. The world's largest coffee retailer is running in so many directions these days that it's hard to keep track. From launching new product categories to chasing growth in emerging markets, Starbucks is bent on world domination. However, some analysts worry that the company's wild growth antics will come back to bite it.

A brief history of self-destruction
Starbucks has been down this road before. Between 2005 and 2007, the coffeehouse chain virtually doubled its number of company-owned stores. Unfortunately, the rapid-fire growth ran away with itself. Beginning in late 2008, Starbucks was forced to close hundreds of underperforming stores. By mid-2009, it had closed 900 locations.

"In 2006 and 2007, I think growth covered up a lot of mistakes," Starbucks CEO Howard Schultz told The Wall Street Journal recently. Since returning to the helm in 2008, Schultz has not only revived the brand, but he's also transformed Starbucks into a top-notch consumer packaged goods company. Now the chain is in the midst of yet another growth spurt.

Why this time is different
Today, there are 19,209 Starbucks locations worldwide. Yet the company continues to aggressively expand its store count, with plans of opening an additional 1,400 outlets next year. However, this time Schultz is also focused on making the stores more profitable. For starters, Starbucks hopes to penetrate new dayparts by adding more food items to its menu. It's also testing alcohol in some restaurants.

Source: Starbucks.

The company's acquisition of bakery chain La Boulange last year fits neatly within this strategy. As of July, roughly 1,076 Starbucks cafes were serving La Boulange products. In 2012, as much as 70% of Starbucks revenue was generated before 2 p.m., according to Forbes. Therefore, a greater focus on food should help Starbucks make more sales from lunch and dinner guests.

Source: Starbucks.

Starbucks is also making a play for the $1.6 billion premium juice category. Since acquiring Evolution Fresh in 2011, it has successfully launched the brand in more than 8,000 Starbucks locations and grocery stores. Moreover, the company's new $70 million juicing facility in California will help it efficiently produce healthy juices and snacks for its budding consumer packaged goods business.

Sales from its packaged goods division only accounted for 8% of net revenue last year. However, CPG should become a larger part of the pie as Starbucks integrates La Boulange, Evolution Fresh, and even Teavana into its business. Similar to what it did with Tazo tea, Starbucks has the opportunity to turn these companies into stand-alone billion-dollar brands.

Room to grow
Starbucks' growing pains are a thing of the past. Sure, the company faces execution risks tied to its recent purchases of Teavana, La Boulange, and Evolution Fresh. However, Starbucks generates enough cash flow these days to support such growth initiatives. In fact, operating income jumped 25% to $615 million during its last quarter. The company's fundamentals are stronger than they've ever been. Top this off with Schultz's laser-like focus on "playing the long game," and Starbucks' growth story appears far from over.

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5/27/2016 4:00 PM
SBUX $55.15 Down -0.14 -0.25%
Starbucks CAPS Rating: ****