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Starbucks (SBUX +4%) is perking up following a WSJ report late Friday that activist investor Starboard Value has taken a stake in the coffee chain. This follows previous reporting from CNBC that Elliott Mgmt had accumulated a stake that could worth as much as $2 bln. Clearly, these firms see value in SBUX shares, which have fallen 30% from their mid-November 2023 highs. We expect these firms will be agitating Starbucks' board of directors to make changes.

• With consumers increasingly seeking value, Starbucks premium pricing has been a headwind. SBUX has missed on revs in each of the past three quarters and four of the past five. It also missed on EPS in Q1 (Dec) and Q2 (Mar), before eking out an in-line EPS result in Q3 (Jun). Other chains, including McDonald's McCafe and Dunkin' Donuts, have proven to be tough competitors. Also, Wendy's has been focusing more on breakfast, including coffee.
• In Q3, SBUX reported that global comps declined -3%, driven by a -2% comp growth in North America and particularly by a -14% comp in China, partially offset by a strong performance in Japan. SBUX sees green shoots in its US business by improving operations and supply chain, while also introducing new drinks, with an increased focus on energy drinks. However, SBUX said it was clearly not satisfied with its China results.
• SBUX feels it can drive demand through new menu offerings. Cold share was up 1% yr/yr in Q3, representing 76% of its beverage mix. Its newly formulated coffees have received positive feedback. Beyond coffee, SBUX noted that its new Summer-Berry Starbucks Refreshers and beverages with Pearls, drove the highest week one product launch in SBUX history. However, there has been criticism the chain has been slow to the Boba "pearl" trend.
• SBUX is also focusing more on the energy category as it recently launched new Handcrafted Iced Energy beverages across its US stores in just three months compared to a normal 12-18 months. But again, Dunkin' and others have been doing more energy drinks and SBUX was a bit slow on this trend as well. Looking ahead, SBUX is excited about the return of Pumpkin Spice in Q4 (Sep).
• Turning to China, the company sees it as one of its most notable international challenges. SBUX has continued to face cautious consumer spending and intensified competition. In the past year, SBUX has seen unprecedented store expansion and a mass segment price war at the expense of comp and profitability. SBUX is in the early stages of exploring strategic partnerships to accelerate growth and innovation in China.

Overall, we always like to see activist investors get involved. These are sophisticated investment firms that are known for their value research capabilities. Starbucks is a great global brand. However, inflation has driven consumers to be more value-focused, and that is not Starbuck's forte. Also, SBUX has been late to the energy and boba trends. And China is a weak spot with no obvious near term fix.

One area where we could possibly see these activist investors request changes be made is SBUX's ambitious new store plans. SBUX said on its JunQ call, that even with 16,700+ stores across the US and another 7,300 in China, SBUX sees abundant white space ahead particularly in Tier 2 and Tier 3 cities as populations continue to move to more suburban and rural areas. SBUX sees new stores as a meaningful part of its growth equation. These firms may also pressure the company to do better on value offerings. Hopefully these firms can spark management to make changes but it will not be an easy turnaround.