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Pastimes : Starbucks SBUX

SBUX 89.97

+1.2%

Jan 12 3:59 PM EST

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To: Sturgeon who wrote (76)	8/28/1996 1:43:00 AM
From: GloriaE	of 148

Rod, I often wondered why SBUX chose the capital intensive approach of owning all their stores. Franchising seems to me a much easier way of expansion. Then it occured to me that at 10% return on equity it is unlikely that they would be able to attract too many investers. What is your view on this? My second question is a little more involved. It seems to me that even ROE may not be the best measurement of a company like SBUX. As SBUX raises capital by issuing convertible bonds, the funds show up as cash on the asset side and debt on the liability side. When they build stores cash is converted into fixed assets. Stockholder's equity remains unchanged. Earning, however, will increase due to the additional stores. Thus, ROE would increase. When SBUX converts the bonds to stock, the debt is removed from the liability side resulting in an increase in equity and the ROE now looks more like the 10% that we see. Since, most of the capital SBUX raises goes into builing stores, wouldn't it be better to look at their return on asset, simply because total asset is a more realistic reflection of the total investment in SBUX? I would appreciate you view on this matter? Gloria

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