Investor sues Starbucks, alleging ‘false and misleading statements’

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Diving:

• 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 in the U.S. District Court for the Western District of Washington in Seattle.

• The lawsuit alleges that Starbucks’ positive statements to investors related to Starbucks’ reinvention strategy, which included a “successful roadmap” for growth outside the US, constituted “false and misleading statements.” Those statements led the plaintiff and other shareholders to buy stock at “artificially inflated prices,” according to the suit.

• Following its release Fiscal Q2 2024 results on April 30, which included a 4% drop in global same-store sales and a 7% drop in traffic, the price of Starbucks common stock fell 15% in a single day, from $88.49 to 74 .55 USD.

Diving Perspective:

It’s not the first time Starbucks has seen investors shrug off poor results. Former CEO Howard Schultz criticized the chain earlier this year, saying it needed to focus on improving the guest experience and mobile app instead of focusing on transactions. Elliot Investment Management, an activist investment firm that has built a position as one of Starbucks’ largest shareholders, engaged with the chain for two months over the summer on the company’s key challenges.

Poor results prompted the chain to fire CEO Laxman Narasimhan and hire former Chipotle CEO Brian Niccol, who has extensive experience in rebranding. Niccol begins his role on September 9, and analysts expect him to help improve operations, marketing and product innovation and attract investors who have been shut out.

As for the lawsuit, the plaintiff seeks to recover losses “in connection with the defendants’ fraud.” The lawsuit specifically names Narasimhan and CFO Rachel Ruggeri, alleging that the two are responsible for making false and misleading statements because they circulated copies of the reports and press releases to the public. The executives knew about the adverse events but did not disclose them, the suit says.

“The allegations in the complaint are unfounded. Starbucks takes great care to communicate transparently and authentically with its stakeholders, including its investors, partners, customers and community,” the company said in a statement emailed to Restaurant Dive.

The story continues

The investor took particular issue with statements made about the chain’s projections and performance in China and the momentum the chain said it was seeing in that market. Respondents also continuously predicted that Starbucks’ reinvention plan would be successful.

“Indeed, the Starbucks Reinvention platform, which the company claimed would prioritize global business growth, failed to deliver on Starbucks’ stated measures; Starbucks’ plan was not equipped to deal with the macroeconomic uncertainty and existing competition, particularly in the Chinese market,” the lawsuit states.

The suit alleges that even after these disappointing results, Narasimhan and Ruggeri downplayed the problems facing Starbucks and the company continued to downplay the risks associated with foreign market expansion. For example, the lawsuit cites analysts at The Week US as saying the chain has 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 more than 16,000 locations. Starbucks is now having trouble meeting its ambitious growth plans in the country.