Starbucks needs to 'turn off the growth valve': Analyst

Starbucks (SBUX) shares are rising on Monday following a report from The Wall Street Journal that activist investor Starboard Value has taken a stake in the company, aiming to boost the coffee stock. Guggenheim Partners senior analyst Gregory Francfort joins Market Domination to discuss his outlook on Starbucks.

Francfort acknowledges that Starbucks has "struggled" in recent years for "a variety of reasons," noting that "a lot of it is structural and a lot of it is industry-wide." He points out the company's aggressive unit growth, saying "it doesn't make sense" given the increased competition in the market. With new stores not contributing as much revenue as expected, Francfort suggests the coffee chain needs to "turn off the growth valve."

Regarding Starbucks's new energy products and its competition in that drink space, Francfort tells Yahoo Finance, "I'm not sure if it's making a dent on a $30 billion-dollar in sales brand in Starbucks." While he describes the new product innovations as "decent" and "pretty solid," he notes that marketing efforts have fallen short.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

All right, shares of Starbucks rising higher today after report that activist investors, Starboard value has taken a stake in the company.

That's according to the Wall Street Journal.

Starboard plans to take steps to boost Starbucks stock price.

It joins Elliott investment management in the turnaround efforts for more on the added urgency that brings Starbucks.

Let's welcome in Gregory, Frankfurt Guggenheim, partners, senior analysts and Gregory.

I just wanna sort of get your broad takeaways here.

It seems like we don't have a good sense of exactly what these activists want Starbucks to do differently and how that's gonna impact what the company is doing.

I'm curious just what you make of the activist positions we've been seeing in the company and what it means for investors that own Starbucks shares.

Sure.

The I I think the anytime you have a company that is this big, this global, it's down 20% year to date.

Um The earnings haven't come down materially.

Um It, it's trading at 20 times earnings, you're gonna get interest from a lot of global investors.

I think, I think Starbucks has struggled the last year or two for a variety of reasons.

Um some of which can, can be blamed on uh, the current CEO, but I think a lot of it is structural, a lot of it industrywide.

And so we're gonna see what these investors have to say.

But, um, we have a few thoughts and I'm happy to go through them.

Let's go through them Greg because, you know, a, as we know, Jeff Smith of Starboard famously told Olive Garden to salt that pasta water more.

And we don't know to your point exactly what we are going to hear from him on this front.

But if he's gonna get that granular, what do you think he should be targeting?

I actually started salting my uh pasta at home after, after you did that several years ago.

But I um I, I think one of the things that they need to do, they've been accelerating unit growth in the U si mean, if you go back 1824 months, they had a 1% unit growth in the US.

This is a company with almost 17,000 US stores.

They are adding 607 100 year over year right now, which they, they probably shouldn't be.

II I don't know that it makes sense to necessarily add that many new units.

This is at a time when scooters coffee has been last year grew 35% unit growth.

Um You have Dutch Pros which is adding a ton of stores.

You have um se seven brew which just kind of come out of nowhere.

They went from 40 units to over 200 in a year.

Um So you have a lot of capacity coming into this space.

And if you look the last two quarters at starbucks' new stores, um, they're only doing 1.5 million, which is down pretty maturely from where they were 9, 12 months ago.

We think they need to turn that off, uh, turn off the, the growth valve and Greg.

What do you make about the efforts then?

From a product standpoint?

Right.

They're launching this new energy drink now, that's been sort of cited as a reason that maybe people aren't going to Starbucks as much.

Maybe they're going and getting one of those canned energy drinks instead they're trying to get into that business.

Does that make sense to reinvigorate growth or is that not really the right choice at this point?

Yeah.

Iii, I look at a company like Celsius which is double its sales year over year, but it's only, it's only $600 million of incremental sales.

So I'm not sure it's making a dent on a $30 billion in sales, uh, brand in Starbucks.

You know, I think they've actually done a decent job with the products.

They've launched, um, spicy Lemonades, bubble teas energy drinks and I tried them all, I think they're pretty solid.

I don't know if they've done a very good job of marketing that and that's one of the things that they've kind of come out and pretty publicly acknowledged is that if you're a core customer that's loyal to the brand, you're still engaging with Starbucks.

But if you are a customer that was coming, you know, once, once a year or, or occasionally they are losing the message with that guest.

I think they, they've not done a great job of traditional media.

Uh, and they've not done a great job of kind of making their products aware of, of, to customers who aren't in their ecosystem already.