Dive Brief:
- A shareholder filed a federal securities class action lawsuit against Starbucks this week on behalf of investors who purchased Starbucks stock between Nov. 2, 2023 and April 30, 2024, according to documents filed with the U.S. District Court Western District of Washington in Seattle.
- The lawsuit alleges that Starbucks’ positive statements to investors related to its Starbucks’ Reinvention strategy, which included a “roadmap of success” for growth outside the U.S., constituted “false and misleading statements.” These statements led the plaintiff and other shareholders to purchase stocks at “artificially inflated prices,” per the lawsuit.
- Following the release of its fiscal Q2 2024 results on April 30, which included a decline of global same-store sales by 4% and a 7% decrease in traffic, the price of Starbucks’ common stock dropped 15% in a single day, from $88.49 to $74.55.
Dive Insight:
This isn’t the first time Starbucks has seen investors pushing back over its poor results. Former CEO Howard Schultz criticized the chain earlier this year, saying it needs to focus on improving the guest experience and the mobile app instead of focusing on transactions. Elliot Investment Management, an activist investment firm that built a position as one of Starbucks’ largest shareholders, engaged with the chain over the course of two months during the summer over the company’s top challenges.
The poor results led the chain to dismiss CEO Laxman Narasimhan and the hiring of Brian Niccol, former CEO of Chipotle, who has extensive experience turning around brands. Niccol starts his position on Sept. 9, and analysts expect him to help improve operations, marketing and product innovation and attract investors who were sidelined.
With regards to the lawsuit, the plaintiff is seeking to recover losses “in connection with the Defendants' fraud.” The lawsuit specifically names Narasimhan and CFO Rachel Ruggeri, alleging the two are liable for the false and misleading statements as they disseminated copies of reports and press releases to the public. The executives knew of the adverse facts but did not disclose them, the lawsuit said.
“The allegations in the complaint are without merit. Starbucks takes great care in communicating transparently and authentically with its stakeholders, including its investors, partners, customers, and community,” the company said in a statement emailed to Restaurant Dive.
The investor took particular issue with statements made over the chain’s projections and performance in China and the momentum the chain said it was seeing in that market. The respondents also continually predicted that Starbucks’ Reinvention plan would be successful.
“In truth, Starbucks’ Reinvention platform, which the Company claimed would prioritize business growth globally, failed to meet Starbucks’ stated measures; Starbucks’ plan was ill equipped to handle the existing macro uncertainty and competition, particularly in the Chinese market,” the lawsuit said.
The lawsuit claims that, even after these disappointing results, Narasimhan and Ruggeri downplayed the problems Starbucks faced, and the company continued to minimize risks associated with foreign market expansion. For example, the lawsuit quotes analysts at The Week US saying the chain bet on Chinese expansion. Executives claimed in 2022 that it was opening a new store every nine hours in the country, but struggled against competition from Luckin Coffee, which has over 16,000 locations. Starbucks is now having trouble meeting its ambitious growth plans in the country.
