Ac­ti­vist In­ves­tor Ack­man Re­veals Stake in Star­bucks

L'Opinion - - The Wall Street & I'Opinion - Ca­ra Lom­bar­do and Ju­lie Jar­gon

William Ack­man’s ac­ti­vist hedge fund has built a rough­ly 1.1 % stake in Star­bucks Corp., a so-far friend­ly bet that the cof­fee giant will re­co­ver from recent stumbles and wea­ther the de­par­ture of its long­time lea­der, Ho­ward Schultz.

Mr. Ack­man un­vei­led Per­shing Square Ca­pi­tal Ma­na­ge­ment LP’s in­vest­ment in the Seat­tle cof­fee com­pa­ny du­ring a pre­sen­ta­tion Tues­day at a confe­rence in New York, his first such ap­pea­rance in se­ve­ral months. He took the stage with an uns­wee­te­ned Star­bucks ice tea.

Mr. Ack­man said he thinks Star­bucks shares have slum­ped re­cent­ly due to a slow­down in same-store sales growth, a re­duc­tion in long-term growth tar­gets and lea­der­ship changes. But he pre­dic­ted the stock could more than double in price over the next th­ree years.

The no­ted ac­ti­vist in­ves­tor said ma­na­ge­ment ap­pea­red to be ta­king all the right steps to get the bu­si­ness back on track, though Per­shing Square hasn’t yet met with Star­bucks exe­cu­tives.

Mr. Ack­man said his fund amas­sed 15.2 mil­lion shares at an ave­rage of $51 a share over the past few months. That means he al­rea­dy has made a ti­dy pa­per pro­fit on the stock, which rose 2.1 % Tues­day to $57.71. Even with that gain, its shares are up less than 1 % this year, trai­ling broa­der mar­kets.

Mr. Ack­man, a fa­med in­ves­tor whose firm has suf­fe­red th­ree years of de­cli­ning per­for­mance due to se­ve­ral bad bets, has re­cent­ly had suc­cess with in­vest­ments where he didn’t em­ploy ac­ti­vist tac­tics. He prai­sed Star­bucks on Tues­day, but didn’t rule out even­tual­ly pres­sing for changes.

If he does, Mr. Ack­man’s in­vest­ment stake could be­come a big test for Star­bucks Chief Exe­cu­tive Ke­vin John­son. Mr. John­son be­came CEO in April 2017 and has been run­ning the com­pa­ny en­ti­re­ly on his own since late June, when Mr. Schultz, who built the com­pa­ny in­to a glo­bal chain, step­ped down as chair­man. Un­til then, Mr. John­son had wor­ked clo­se­ly with Mr. Schultz, whose of­fice was next door.

Star­bucks said in a sta­te­ment that it looks for­ward to “main­tai­ning a pro­duc­tive dia­logue with Mr. Ack­man as we do with all of our sha­re­hol­ders.” The com­pa­ny has been strug­gling with slo­wing sales over the past few years in the U.S., an in­crea­sin­gly com­pe­ti­tive mar­ket for cof­fee.

Af­ter some ana­lysts cri­ti­ci­zed the ubi­qui­ty of the brand, the com­pa­ny in June said it would close 150 U.S. stores in its 2019 fis­cal year, triple the num­ber it clo­sed on ave­rage in recent years, and that it would slow the growth of li­cen­sed stores in air­ports, su­per­mar­kets and other re­tail stores. Star­bucks will still open more stores ove­rall, but at a slo­wer rate of growth in fis­cal 2019.

Those clo­sures will most­ly be in ur­ban mar­kets, where Star­bucks stores are tight­ly clus­te­red and rent and wages are high, Mr. John­son said at the time. He ad­ded there was still room to build more Star­bucks in the Mid­west and South. Mr. Ack­man said the same thing du­ring his pre­sen­ta­tion. Star­bucks has about 14,400 U.S. stores cur­rent­ly.

Mr. Ack­man al­so no­ted Star­bucks’s same-store sales have consis­tent­ly been po­si­tive and that it is the do­mi­nant brand in the fast-gro­wing cof­fee ca­te­go­ry.

“Young people are gi­ving up so­da for cof­fee,” he said while ans­we­ring ques­tions af­ter his pre­sen­ta­tion. “Star­bucks will be the big­gest be­ne­fi­cia­ry of that change.”

But part of Star­bucks’s U.S. sales slow­down stems from consu­mers’ mi­gra­tion to heal­thier drinks. Sales of its su­ga­ry Frap­puc­ci­nos, which ac­count for 11 % of sales at U.S. com­pa­nyo­pe­ra­ted cafes, fell 3 % this year through May. Just th­ree years ago, Frap­puc­ci­no sales grew 17 %. Star­bucks has wor­ked to re­duce the su­gar and ca­lo­rie content of the drinks and is tes­ting heal­thier ver­sions in a few states.

The U.S. isn’t the on­ly mar­ket that has strug­gled. The com­pa­ny sur­pri­sed in­ves­tors in June when it re­por­ted a sud­den sales slow­down in Chi­na, a coun­try it had been tou­ting as a high-growth mar­ket. In Ju­ly, it re­por­ted same-store sales in Chi­na fell 2 % in its fis­cal third quar­ter as it lo­we­red its glo­bal same-store sales growth out­look. Star­bucks has since ta­ken steps to re­me­dy its troubles there.

Mr. Ack­man said he likes Star­bucks’s long-term growth pros­pects in Chi­na. “We ex­pect Chi­na will grow near­ly twice as fast as Star­bucks’s ove­rall ear­nings and re­present an in­crea­sin­gly lar­ger per­cen­tage of the com­pa­ny’s ear­nings,” he said in his pre­sen­ta­tion. Mr. John­son’s plans for boos­ting U.S. sales, meanw­hile, have re­vol­ved around ex­pan­ding its “di­gi­tal re­la­tion­ship” with cus­to­mers by ope­ning its mo­bile-or­der app to people who aren’t in its re­wards pro­gram.

In a me­mo to em­ployees last month, Mr. John­son hin­ted at his concerns when he said the com­pa­ny would re­struc­ture, a move that would in­clude layoffs. “We must knock down the bar­riers in our de­ci­sion-ma­king and pro­vide more cla­ri­ty on the work that is im­por­tant and what is not,” he said in the me­mo, which was re­vie­wed by The Wall Street Jour­nal.

Mr. Ack­man, meanw­hile, has cut back on pu­blic ap­pea­rances af­ter his bad bets, in­clu­ding on Va­leant Phar­ma­ceu­ti­cals (now known as Bausch Health Cos.) and against Her­ba­life Ltd., which spur­red de­clines and promp­ted some in­ves­tors to wi­th­draw. The Jour­nal re­por­ted in April he might face a fu­ture that wouldn’t in­clude him ma­na­ging a pri­vate hedge fund.

Per­shing Square has re­co­ve­red so­mew­hat re­cent­ly, with its pu­blic fund, which clo­se­ly tracks its pri­vate fund, up 15.8 % this year through last month, bea­ting broa­der mar­kets.

The $8.4 bil­lion Per­shing Square – which be­came wellk­nown for high-pro­file ac­ti­vist cam­pai­gns at com­pa­nies such as J.C. Pen­ney Co. and Ge­ne­ral Growth Pro­per­ties Inc. – made a quick pro­fit of about $100 mil­lion on Nike Inc. ear­lier this year wi­thout agi­ta­ting for change. The fund al­so has been sup­por­tive of ma­na­ge­ment at Chi­potle Mexi­can Grill Inc., one of its best-per­for­ming hol­dings.

SIPA PRESS

The Star­bucks store in Mi­lan. Ac­ti­vist in­ves­tor William Ack­man says his Per­shing Square fund has a stake in Star­bucks.

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