Starbucks ( SBUX -3.14% ) The famous coffee chain has attracted the interest of a prestigious hedge fund that is committed to revitalizing the struggling company.
Elliott Management, a prominent investment firm, is a major player in the industry. It buys shares in publicly traded companies and implements changes to enhance their operations, earning the reputation of being a significant influencer in the market. activist The investor achieves its goals by obtaining board seats, replacing executive teams, and occasionally privatizing companies. Through these methods and others, the fund has achieved impressive profits. Between 1977 and 2022, it recorded an average annual return of 13.5%, which is almost 2% higher than the benchmark. S&P 500 .
Elliott has decided to invest in Starbucks as he believes there is a chance to assist in restoring the company to its previous success. In the past three years, the coffee chain has been a disappointing investment, with its shares declining by 19% compared to the S&P 500’s increase of 22%.
Therefore, should investors view Elliott’s participation as an indication that Starbucks’ situation may improve and consider investing in the undervalued stocks?
Contents
- 1 Is it advisable for investors to follow Elliott’s wave and put their money into Starbucks?
- 2 Starbucks’ concept of a welcoming “Third Place” is losing its luster, yet prices continue to increase.
- 3 Customers will not tolerate prices increasing beyond a certain point.
- 4 Investors are advised to enhance their portfolio with more robust elements due to increasing concerns about a recession.
Is it advisable for investors to follow Elliott’s wave and put their money into Starbucks?
In brief, it is not advisable to follow Elliott’s stock investments as historically it has not been successful. Research conducted from 2018 to 2022 indicates that investors who attempted to mimic Elliott’s strategy would have underperformed the S&P 500 by 12% annually.
Even though Elliott probably had a hand in the selection of the new Starbucks CEO Brian Niccol, the company’s latest strategy remains a mystery. Therefore, let’s examine its current status.
Starbucks’ concept of a welcoming “Third Place” is losing its luster, yet prices continue to increase.
Howard Schultz, the visionary leader of Starbucks, transformed the company into the biggest coffee chain globally. Inspired by the sense of community and coziness he encountered at Italian coffee establishments, Schultz aimed to replicate that experience worldwide through Starbucks. The objective was to create Starbucks as a unique space, known as the “Third Place”, where individuals could come together and socialize outside of their homes or workplaces.
Currently, Starbucks is not a popular destination for lingering. In the US, more than 70% of the company’s sales are made through its mobile app and the drive-thru. Additionally, there are stores where customers are not able to sit and enjoy their drinks.
The company is facing a challenge with its significant price hikes. The average cost of orders has risen by 50% from 2020 to fiscal Q2 2024, surpassing the 21% increase in the Consumer Price Index (CPI) during that time. Convincing customers to accept price rises that are more than double the inflation rate is proving difficult, particularly when the Starbucks experience may no longer offer the same appeal as before.
Customers will not tolerate prices increasing beyond a certain point.
Starbucks is experiencing a decline in its value offering, which is resulting in weak financial results. Following the third quarter of the fiscal year, the company’s revenue growth over the past year was the lowest in 13 quarters, standing at only 4%.
The situation appears more dire when looking at comparable store sales. This metric excludes sales from new stores, which can artificially inflate revenue. Analyzing comparable store sales offers a more accurate insight into revenue patterns.
There has been a decline in sales at stores with a similar performance. It appears that customers may have reached their limit with the higher prices at Starbucks and as a result, they are purchasing fewer items.
During the last quarter, there was a decline in global comparable store sales due to a decrease in the number of orders, possibly caused by an increase in the average order price. The situation was even more severe in the preceding quarter. Particularly in China, where the company operates the most stores after the United States, the figures were notably poor.
Despite the company raising its prices, its gross margin has decreased. It was 28.4% in the third quarter of 2023 and has now dropped to 27.9%. The increase in labor and material costs for producing drinks is rising faster than the company’s revenue growth.
Investors are advised to enhance their portfolio with more robust elements due to increasing concerns about a recession.
Starbucks’ current forward price-to-earnings ratio stands at 24, which is lower than its 10-year historical average of 28.5. Despite this, there is a concern that the company’s comparable sales might continue to decline due to growing recession fears.
Consumer confidence has decreased for the past four consecutive months, and the recent drops in the stock market are not expected to reverse this trend. Consumers are likely to become more cautious about splurging on Starbucks’ expensive items.
The decision to appoint Niccol is a positive move, but it is not expected to bring immediate changes to the company or overcome the current economic challenges. It is advisable for investors to wait for Niccol to outline his plans for Starbucks before fully committing.
