Financing

Starbucks is sued over its bad earnings results

A shareholder has filed a class-action lawsuit accusing the coffee shop giant of making overly rosy projections late last year before its sales, particularly in China, turned starkly south.
Starbucks misled investors on the state of the company's China business. | Photo: Shutterstock.

Starbucks executives misled investors with overly rosy projections on sales and earnings last November, particularly when it comes to China, resulting in a brutal year for company stock, according to a lawsuit filed against the coffee shop giant this week.

A shareholder filed the class-action lawsuit against the Seattle-based chain in a federal court on Wednesday. The lawsuit covers the period from Nov. 2, 2023, when Starbucks announced its earnings projections for 2024, and April 30 of this year, when those projections succumbed to broad, global weakness.

The lawsuit centers around comments company executives, including former CEO Laxman Narasimhan and CFO Rachel Ruggeri, made at that November presentation.

The subject of that presentation was the “Triple Shot Reinvention with Two Pumps” strategy. It was an outgrowth of an earlier Reinvention strategy formulated by Narasimhan’s predecessor, Howard Schultz. And it was marked by aggressive projections for sales and earnings, the result of changes the company was making in operations and a return to sales growth in China, Starbucks’ second-biggest and most important growth market.

But those projections ran into problems almost immediately. By January, Starbucks warned about U.S. sales, after those sales started falling in November and remained there. But executives were still touting improvement in China, the lawsuit says.

“Starbucks’ plan was ill-equipped to handle the existing macro uncertainty and competition, particularly in the Chinese market,” the lawsuit says. Starbucks “misled investors by providing the public with materially flawed statements of confidence and growth projections” between November of last year and April of this year.

On April 30, Starbucks released one of the most fateful earnings reports in its history. The company reported guidance for sales and earnings that fell well below its expectations. The company lowered its projections for the full year. That included a 4% decline in same-store sales worldwide, driven by a 6% decline in transactions.

The earnings call led to a 15% decline in the company’s stock price that day.

Based on analyst reports stemming from the report, “the public placed significant weight on Starbucks’ statements of prior confidence in their ‘Triple Shot Reinvention with Two Pumps’ plan,” the lawsuit says.

The earnings call certainly prompted recriminations from across the business media and investment communities and even from Schultz—who handpicked Narasimhan to be the CEO.

And it ultimately led Starbucks to shift gears and hire Brian Niccol away from Chipotle Mexican Grill to be its new chairman and CEO with a substantial bonus and far more control than any previous new CEO hire not named Schultz had ever had.

Steep declines in stock prices frequently yield shareholder lawsuits, making Starbucks only the latest in a long line of such legal actions. Niccol’s hiring has since prompted a recovery in company stock.

Yet the lawsuit also highlights the particular influence of the China problem on the company. In January, when executives were warning about Starbucks’ U.S. sales, executives were boasting about the company’s performance in the Asian nation.

China’s same-store sales declined 14% last quarter, Starbucks’ fiscal third period. That decline came as customers ordered cheaper items and visited the shops less often, and came as a generation of locally-owned companies flooded the market with cheap coffee and a lot of stores.

In January, however, executives boasted about progress in the country. “We also saw great momentum in China,” Narasimhan said at the time.

The lawsuit quotes an analyst from William Blair in the aftermath of the earnings call. “We view the issue related to competition as synonymous with questions related to the health of Starbucks’ brand, as frankly lower-priced coffee has always been available in every one of Starbucks’ market and has not impeded Starbucks’ success,” the analyst said.

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