This NYT article about Starbucks' recent store closing announcement reminded me of a good question for my due diligence questionnaire:
When your potential money manager is pitching you his best idea, and that idea happens to be a company that's growing by adding more units, especially an already well-known retailer adding stores, question him mercilessly on the growth assumptions he's making. Why? Because as surely as night follows day, a publicly traded retailer will try to grow too fast in order to please Wall Street. Then the day will come when it announces it's closing stores and "returning to basics" by trying too improve its existing stores, which to no one's surprise have been neglected. It's amazing how strong this force is. A few short years ago Starbucks was considered a savant at choosing locations, but the demands of Wall Street proved stronger. Mickey Drexler at the Gap could do no wrong, but he opened too many stores. Wal-Mart in recent years, same thing. McDonald's too I think, until they turned it around.
Are there exceptions? Yes. A small company obviously has more room to grow, but it had better be small. There are others, but often there is a catch, some insight that helps to explain things. Wal-Mart under Sam Walton grew very quickly, but in a very disciplined way. Check out this neat video that shows graphically how he went about adding stores. Note how he waited a long time before entering New York and California, which no other retailer would have done. This unusual growth pattern reflected Wal-Mart's desire to avoid having to compete with other large retailers for as long as possible, its desire to maintain Wal-Mart's focus on non-urban shoppers (and employees too, by the way), and its famous rule about only building stores within easy distance of existing distribution centers.
The point is, your money manager should understand these dynamics and should have already thought about them. If he's confident in his growth assumptions he should have a good answer for why.