It's been a little over two years since the Rule Breaker Portfolio bought Starbucks (Nasdaq: SBUX). We typically don't spend a lot of time talking about it. Part of the reason may be that it's one of our smaller holdings, accounting for less than 3% of the portfolio, but the main reason is that the darn thing just keeps on chugging. The company has made some strange peripheral moves that have made the stock price gyrate like a pigeon in a jet engine, but the core business has rocked.

I'm not just talking about revenue and net income growth. Any company growing by leaps and bounds can produce an impressive-looking income statement. Long-time Fools remember seeing Dave & Buster's (NYSE: DAB) and Rainforest Caf� (Nasdaq: RAIN) attract attention because of strong growth, financed by an unsustainable buildout. Both now reside in the stock market equivalent of purgatory, waiting for the day when their rotten skeletons finally collapse under their own weight.

A glance at Starbucks 36% annual unit growth over the last five years might make an investor fear that the coffee king will suffer the same fate. When you consider that the company has seriously ramped up its unit growth targets this year, aiming for 900 new stores this year, you might worry about overextension. Here's a chart of store numbers: 

              2000  1999  1998  1997  1996  1995
Company owned 2489  2135  1688  1301   938   628
Licensed       726   363   198   111    77    49
(The significant growth in licensed stores this year comes from supermarket expansion, especially Starbucks deal with Albertson's, which has yielded 194 stores this year.)

There is something that sets Starbucks apart from the Dave & Buster's of the world, however: Comparable-store sales (comps). My fans -- sorry, fan (hi, Mom) -- have heard me rhapsodize about comps before. They are vital to the survival of any retailing operation. They tell you whether a store can continue to produce returns after the initial novelty wears off.

Starbucks comps have virtually no equal. They report spectacular results practically every month. In the second quarter, the company returned outstanding 10% comps, prompting Jeff Fischer to comment, "It is unlikely that same-store sales will be able to rise 10% again anytime soon."

Last Thursday, Starbucks reported 10% comps in the third quarter.

I'm not saying that we should expect those kinds of comps to continue, but I do note that this is a company that knows how to boost comps. Check out fun chart #2, Starbucks comps over the last five-and-a-half years: 
        YTD00  1999  1998  1997  1996  1995
Comps (%) 9      6     5     5     7     9
Those numbers are just spectacular. For comparison, here are comps for some other brand-name chains (all numbers are percentages; parentheses denote negative numbers): 
            1999  1998  1997  1996  1995
Taco Bell      0     3     2    (2)   (4)
Pizza Hut      9     6    (1)   (4)    4
Panera Bread  3.3   2.1   3.6   0.7   0.5
I chose those companies at random. If you can think of a better comparison, I encourage you to pursue it. If you can find any retailer with consistently better comps, let me know about it on the Rule Breaker Companies board. That's a company worth pursuing.

Of course, we can't expect Starbucks to continue at that torrid pace indefinitely. We can't even expect positive comps all the time. Its mix of ever-higher traffic and rising revenue per sale (each factor accounted equally for the recent 10% gain) has really spoiled the Street. Starbucks' ability to introduce new products that gain immediate acceptance -- most recently the Chocolate Brownie and Orange Mocha Chip Frappuccino -- has made its position somewhat uncomfortable.

Starbucks is treading a risky path, growing more quickly than its operating cash flow. One day, without doubt, rain will fall again in Seattle. There will come a quarter when the company reports negative comps. Maybe it will even happen next year, in spite of management's prediction that they will stay in the mid-single digits.

When that day comes, lots of shareholders will make for the exit. If it happens next year, when the company plans to add 1,100 stores -- even more than this year's 900 -- they'll bolt like partying high school kids at the sound of sirens. If that slowdown lasts a year, Starbucks could see its share price completely tank.

The company has shown that it can produce consistently. That's why it continues to trade at a high multiple (currently about 41 times estimates for fiscal-year 2001). Given its 45% earnings growth rate over the last five years, that may not be unexpected, but don't let the company's consistency lull you to sleep. Starbucks is still a Rule Breaker, not a Maker. It is successfully pursuing a rapid-growth strategy in a field with little organized competition. It hasn't become invulnerable.

For a lot more on Starbucks, check out Motley Fool Research, which covers the company.

-- Brian Lund, Grande Americano to the local baristas, TMF Tardior to you.

Your Turn:
Let us hear what you think about Starbucks' business plan on our Starbucks Discussion Board!

Suggested Links:

  • Dueling Fools, 7/26/00: Starbucks Wars
  • Fool Research, 6/27/00: What's Behind Same Store Sales?
  • Fool News, 6/27/00: Starbucks Is Turning Japanese
  • Fool Research, 5/16/00: Q&A on Starbucks
  • Rule Breaker, 4/28/00: Starbucks Boils Over
  • Fool News, 4/28/00 : Starbucks Heats Up Expansion Plans