The past few weeks have been a real grind for investors in Starbucks (SBUX). First came the news in July that the coffee behemoth was closing more than 600 U.S. stores. Then the company posted a $6.7 million loss in the third quarter. And now, there's news that another big shareholder has liquidated its position in the company. On Aug. 14, the hedge fund Maverick Capital reported in an SEC filing that it had dumped 12.5 million Starbucks shares sometime before June 30.
Other major investors that unloaded their shares were Nelson Peltz's Trian Partners, which sold more than 800,000 shares, and Fidelity Management & Research, which shed 5.5 million. In the past year, Starbucks' stock price has slipped more than 15%.
It begs the question: Why are some bigger investors cashing out, and do they see new trouble brewing for Starbucks? (Both Maverick Capital and Trian Partners declined to comment for this story, and Starbucks did not respond to an e-mail request for comment.)
In a third-quarter conference call, Starbucks Chief Executive Howard Schultz emphasized the company was "transforming the business for long-term, profitable growth" as the seemingly ubiquitous brand scales back its growth and tries to revitalize its image as a cozy, upscale coffeehouse on every corner. (Schultz's transformation may still be a ways off: On July 29, Starbucks said it was slashing 1,000 support positions worldwide, and closing 61 of its 84 stores in Australia.)
To be sure, some investors still think highly of the coffee king, and are banking on the company's cost-cutting to reignite depressed share prices. Between Mar. 31 and June 30, Lateef Management Associates purchased more than 14.5 million Starbucks shares, and D.E. Shaw increased its position by more than 5.8 million shares over the same period. Plus, many restaurant companies would still kill for Starbucks' 26.5 price-earnings ratio, which dwarfs the industry average of 19.1, according to Standard & Poor's.
Restoring Luster
But Schultz faces a tough battle in bringing back the company's traditionally prolific growth. As recently as 2004, Starbucks' stock traded at an eye-catching 68 times earnings for the trailing 12 months, according to S&P research. "The big problem is they've been at the demands of Wall Street for so long to continually increase sales and increase the rate quarter-over-quarter," says Andrew Hetzel, a coffee industry consultant. "But you can only do that for so long."
Since reclaiming the CEO spot in January after an eight-year hiatus, Schultz has launched several initiatives to restore the luster to the Starbucks brand amid increased competition from Dunkin' Donuts and McDonald's (MCD) and a steady slide in the company's stock price. In April, the company tweaked its logo and introduced a less-potent coffee blend called Pike Place Roast—named after the Seattle market in which Starbucks was first offered—to stress the company's roots while catering to more mainstream coffee drinkers. In June, Starbucks began offering customers free Wi-Fi access in stores as part of a customer loyalty program. And in July, Schultz began offering fruit smoothies to spur afternoon sales. While costs have increased, some of the efforts may have helped: Third-quarter revenues increased 9% to $2.57 billion.