POST OF THE DAY
Starbucks Corporation
The False Gods of SSS and Margin

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By callisto2
April 12, 2005

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In the article (http://msnbc.msn.com/id/7453836/) mentioned in the last post, a fund manager is concerned because he believes that Starbucks "...is starting to saturate its lucrative U.S. markets...."

This, and our recent debates about SSS (same-store sales), got me thinking: what's the very best evidence of saturation, in most analysts' minds? Well, flat or dull SSS performance, of course! If SSS is poor in an area rich with Starbucks outlets, no further evidence is usually required to show that the new stores are stealing from the old, and that that's bad.

Yet consider: If a new Starbucks shows up that's more convenient to my commute, I will cease going to my current "inconvenient" one. SSS will suffer. Yet the new store will attract people who never used to go to Starbucks at all. In the end, there might be fewer people per store, but a whole lot more customers--and probably profit--total.

This is where the second topic, "margin percentage," comes in. Many analysts are obsessed with margin percentages, and if a company brings out new products with a lower margin percentage than its existing products, they can get slammed for this. I've also seen cases where company CFOs refuse to add on low[er]-margin products because "it'll hurt margins."

But worshiping at the altar of SSS and margin percentages is wrong, or at least incomplete.

Should a company prefer a single store with $1.0MM of revenue, or two stores with $0.9MM revenue apiece? It surely depends on rents, salaries, overhead, but I'm guessing the answer is: yes.

Should a company prefer $1.0MM of revenue with 50% gross margin, or $1.2MM of revenue with 46% gross margin? Again, it depends on inventory costs (and much else), but I'm guessing the answer is: yes.

Are SSS and margin percentage useful tools? Sometimes! However, in watching analysts' comments about stocks over the past 10 years, I note the fetishization of SSS, the fetishization of margin percentage, and it misses the big picture.

Just as a cigar is sometimes just a cigar, total profit is sometimes actually the correct metric to use, SSS and margin be damned!

--Callisto2


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