How Starbucks can increase shareholder value even as activist pressure exacerbates problems

Starbucks may need more than an energy drink to re-motivate its investors.

Pressure is growing from activist investor Elliott Investment Management, which has acquired an undisclosed stake in the company, according to a Wall Street Journal report on Friday.

Following the news, Starbucks’ share price rose nearly 7 percent after the market closed, after falling more than 21 percent last year. The stock opened Monday down about 3 percent.

Citi analyst Jon Tower told clients in a note that the stake “shouldn’t come as a huge surprise to investors.” The chain’s shares fell 14% after releasing second-quarter results, when it reported its first quarterly revenue decline since 2020.

Elliott did not respond to a request for comment from Yahoo Finance, while Starbucks told Yahoo Finance that it does not “comment on rumors.”

Investors are concerned about Starbucks’ ability to reverse the decline in customer traffic in the U.S., stay competitive with innovation and special offers, improve operations and counteract weakening sales in China.

Now Wall Street is weighing what Elliott would focus on and what that might mean for the stock.

“A resolution will not prove easy as it will likely require more difficult decisions around the growth algorithm, investments and core market strategies, potentially impacting revenue and profit. However, the presence of activists should provide a short-term floor for the shares,” Tower wrote.

“Investors have questioned Elliott’s experience and track record in the consumer goods sector. We believe an external nudge could accelerate bold decisions and provide interesting risk-reward opportunities for long-term investors willing to accept that a turnaround may take some time,” Bernstein analyst Danilo Gargiulo wrote in a note to clients.

Here are 10 points that Gargiulo believes the Elliot team would prioritize.

Last quarter, Starbucks’ U.S. footfall fell 7%, which “shocked a lot of people,” BTIG analyst Peter Saleh told Yahoo Finance. A revival of U.S. footfall is “the key driver of stock value” over the medium term, TD Cowen analyst Andrew Charles said in a note to clients.

In May and June, the chain introduced boba-like pearls and energy drinks, as well as a promotional menu of matching drinks. For $5 or $6, customers can get a small iced coffee or hot coffee with a buttery croissant or breakfast sandwich.

“We would like to see some evolution or some confidence that customer traffic here will improve,” Saleh said of the new menu offering.

Gargiulo said his team was pleased with both beverage launches and “expects further investment in product innovation to bring customers back into stores” and reach a Generation Z audience.

The story goes on

But the low-cost offerings could “dilute the brand’s perception as a premium brand in the long run,” Gargiulo added in his comment.

Another challenge is improving the brand’s image. According to Saleh, the much-discussed price increases are roughly in line with the industry average or even slightly below it, but the brand is struggling to shake off its stuffy image.

“I’m not really convinced that Starbucks has a real values ​​problem … They had a social media problem with the boycott” that began last fall, Saleh said.

In October, the Starbucks Workers United union posted “Solidarity with Palestine!” on X (formerly known as Twitter), which some consumers interpreted as Starbucks’ support for Hamas.

Starbucks condemned the idea, but the perception has already sparked a boycott, prompting CEO Laxman Narasimhan, who will take over the role in March 2023, to issue an internal memo.

Another must is improving store operations, especially during peak hours. The company has implemented the Siren system, a new operating system designed to improve order speed and throughput.

By the end of May 2024, more than 1,000 U.S. stores began testing the new system.

Starbucks needs to “accelerate the rollout of the Siren system, which addresses the challenges faced by local baristas and store partners and strengthens the behind-the-scenes processes for digital ordering,” such as a second brand line similar to Chipotle (CMG), Gargiulo said.

In addition, results in the second largest market, China, need to be improved.

Last quarter, China saw the biggest decline of any Starbucks segment: store sales fell 11%, customer traffic fell 8% and the average receipt value fell 4%.

“Performance was impacted by a decline in casual customers, changing holiday patterns, a promotional-heavy environment and a normalization of customer behavior following the market reopening last year,” Narasimhan said on the conference call with investors.

In a note to clients, Bank of America analyst Sara Senatore said Starbucks’ performance in China was related to industry-wide issues.

“Intense competition is the natural state of the restaurant market and even the strongest brands are not immune to it,” she said. “The direction of SBUX’s sales growth in China is highly correlated with other global brands. And all correlate with macro factors (GDP).”

Gargiulo believes that franchising could be the way to go in this market as it is “an equally attractive alternative to drive the expansion of one of the largest coffee markets without investing capital” and is less dependent on “fluctuating macroeconomic conditions”.

The company continues to aim to have 9,000 locations in China by 2025.

All these efforts may not be fast enough for shareholders.

In a Morgan Stanley note, analyst Brian Harbour wrote that most would agree with Starbucks management’s second-quarter comments that a turnaround would take time, which “clouds the near-term investment outlook.”

A recovery in sales and earnings could be in sight for fiscal 2025, but “the stock seems to be pricing in that it would take much longer,” Harbour added.

Tower expressed a similar opinion in a customer communication.

“The bears clearly dominate the narrative, although this could change if revenue dynamics change and/or the company articulates a clear plan for cost cutting, Siren revamps and/or China,” he wrote. “If the above doesn’t happen, we see little investor interest in buying shares again, leaving room for shares to continue to lag the market and peers.”

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Brooke DiPalma is a senior reporter at Yahoo Finance. Follow her on Twitter at @Subscribe to or email her at [email protected].

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