Ackman's bet is one on Starbucks' potential in China, where opportunities are vast yet competition is fierce. Starbucks' recent moves to free up cash should give it what it needs to start addressing the challenge at scale.
— Jason Clampet
Bill Ackman, announcing a $900 million stake in Starbucks Corp. Tuesday, said he believes the coffee chain giant’s shares can more than double over the next three years.
That’s because its troubles are surmountable and it has tremendous growth opportunity with its expansion plans in China, Ackman said in a presentation at a conference in New York
“We believe Starbucks’ recent challenges are fixable with appropriate management execution,” Ackman said in the 43-page presentation entitled “Doppio,” the Italian term for double espresso.
“We expect that China will grow nearly twice as fast as Starbucks’ overall earnings and represent an increasingly larger percentage of the company’s earnings,” he added.
Starbucks is a “category killer” in coffee purchases away from the home, Ackman said, noting that its market share is 15 times larger than the No. 2 player in the space — McDonald’s Corp. — and 3.5 times bigger than the other top 10 players combined.
Starbucks rose as much as 5.6 percent after Ackman disclosed that his Pershing Square Capital Management had acquired 15.2 million shares in the company. They were up about 2 percent to $57.78 at 3:12 p.m. in New York trading Tuesday, giving the Seattle-based company a market value of about $77.9 billion.
“We view the active, engaged dialogue that we have with shareholders as critical input into our strategic approach and we value constructive feedback on delivering long-term shareholder value,” a spokesperson for Starbucks said in a statement. “We look forward to maintaining a productive dialogue with Mr. Ackman as we do with all of our shareholders.”
The coffee chain has been struggling with slow afternoon sales and a decline in its signature Frappuccino line. It’s also been facing pressure as customers — who once saw Starbucks as high-end — trade up for more premium coffees. In June, it announced plans to close about 150 company-operated stores in densely penetrated U.S. markets next fiscal year. That’s three times the number it historically shuts down annually.
Last month, the company said it was also planning structural changes, including layoffs, starting at the top levels to help make decisions faster.
It named a new chief financial officer Monday, Patrick Grismer, who joins from Hyatt Hotels Corp., where he was CFO. In June, former CFO Scott Maw announced plans to retire this year, which spooked investors already worried about stability after visionary leader Howard Schultz departed the same month.
U.S. sales growth has stalled, although business abroad has been booming and the chain has been increasingly adding more cafes. Starbucks also faced backlash this spring after two black men were arrested at one of its stores in Philadelphia while waiting for a meeting to begin.
Starbucks is rapidly expanding in China — a market it eventually sees as surpassing the U.S. It aims to have 6,000 stores and triple revenue in China over the next five years.
The issues dragging on same-store sales in the U.S. are temporary, Ackman said, citing recent changes to its loyalty program and weak sales of Frappucinno and other core beverages. He was encouraged by management’s recently announced plans to reinvigorate sales through new premium products, new concepts for boutique stores, healthier offerings and a roll-out of an improved mobile ordering and payment app.
Starbucks has a “long runway for high-single-digits” growth led by its expansion in China, Ackman said. Shareholders will also benefit from its plan to buy back roughly $14 billion shares over the next two years, an amount equivalent to about 20 percent of its current market capitalization, he said.
“We estimate that every dollar Starbucks spends building a new store in the U.S. or China is worth $10 to $15 shortly after the store opens,” he said in the presentation. “China will become increasingly important to the value of Starbucks over time as it represents Starbucks’ single-largest unit growth opportunity.”
Ackman said in August that his hedge fund, Pershing Square Capital Management, had built up a new position valued at about $800 million in a company he didn’t identify.
This year, Ackman has also disclosed new positions in industrial manufacturer United Technologies Corp., where he is advocating for a breakup of the company, and retailer Lowe’s Cos., where he said he was supportive of Chief Executive Officer Marvin Ellison’s efforts to improve the company’s performance.
He also sold a stake in Nike Inc. this year at a profit of about $100 million in a just few months. In August, Ackman sold down his stake in Chipotle Mexican Grill Inc. as part of a portfolio re-balancing. He sold about $401 million worth of his stock in the burrito chain, reducing his position to 7.4 percent from 10.4 percent previously, according to a filing.
Ackman pledged in March to end three years of underperformance at Pershing Square, calling its most recent returns at the time “particularly unsatisfactory.”
Last week, Pershing Square reported a net return of 15.8 percent on its investments year to date through the end of September compared to gains of about 8 percent for the S&P 500 during the same period. The firm’s assets under management have fallen about 10 percent this year to about $8.4 billion, though that total is up from about $8.3 billion at the end of August.
Pershing square had a net loss of 4 percent in 2017, following a decline of 13.5 percent in 2016.
–With assistance from Courtney Dentch, Joshua Fineman and Leslie Patton.
©2018 Bloomberg L.P.
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