https://www.barrons.com/articles/will-activist-investors-pop-into-starbucks-1528502402
Will Activist Investors Pop Into Starbucks?
Ben Levisohn
Eka Shoniya
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Howard Schultz has left the building. Time for activist investors to gather at Starbucks ' gates?
Schultz, who built Starbucks (ticker: SBUX) from a corner cafe into a global double-caramel macchiato powerhouse, announced this past week that he would step down as chairman and leave the company. His departure comes as Starbucks continues to struggle with sluggish sales and a range-bound stock price.
Without the charismatic Schultz, the time might be right for an activist investor to push for change—and presumably push Starbucks shares higher.
Barron's last checked in on Starbucks in the summer of 2017 ("Starbucks Teaches Silicon Valley a Lesson in Tech," Cover Story, Aug. 19), highlighting its digital offerings. At the time, 9% of transactions were placed in advance with the company's app, and 30% were paid with phones. We figured greater use of technology would help spur growth in same-store sales, or sales at stores open at least a year.
App-usage is up since then. In the latest quarter, 12% of Starbucks transactions were placed in advance and 34% of orders were paid for with the app. Yet same-store sales rose just 2% in the three months ended April 1, the third consecutive quarter of 2% gains. Same-store sales increases had been as high as 8% in 2015.
Starbucks shares have returned 9% since our story ran, compared with a 16% return for the S&P 500. The stock has been stuck, since Sept. 1, 2015, in a range from $51.77 to $64.57. Shares closed on Friday at $56.60.
It's the stagnant share price that could be the catalyst for activist involvement. Bernstein analyst Sara Senatore observes that the three-year mark is often when investors start getting antsy with stocks. She points to activist investor Starboard Value's campaign to shake up Darden Restaurants (DRI), Luxor Capital Group's campaign with Panera Bread, and the three-year stuck share price that ultimately led to big changes at McDonald's (MCD) as recent examples.
With Schultz out of the picture, activists could have an easier time being heard. "With him gone, this becomes a straightforward conversation between the management team and investors about the current strategy," Senatore says.
But activists could find that many strategies won't work with Starbucks. The company doesn't own most of its real estate, and thus can't sell it. It doesn't have multiple restaurant chains to separate, as Darden did. Nor would it benefit from selling stores to individual operators, a process known as "refranchising," as McDonald's did, because Starbucks' stores are too profitable and the resulting deals would eat into earnings.
That means focusing on capital allocation. Store count rose by 8% for the four quarters ended April 1, but if Starbucks is a mature business, as Senatore contends, more store openings could take business away from existing stores. Instead, she argues, Starbucks should open fewer stores, spend to improve existing units, and return more cash to shareholders.
With the ratio of debt to earnings before interest, taxes, depreciation, and amortization below one, Starbucks could borrow to repurchase more shares than its existing buyback program allows. If it bumped the ratio up to nearly three times, it could buy back 15% of its stock, Senatore says. "When new-unit returns start to diminish, you spend less on growth and return more to shareholders," she says.
There are reasons to be encouraged. Starbucks might make these moves on its own. Its business is still strong. With the right changes, the stock could exit its trading range to the upside.
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