Peltz's Stake in Starbucks is Good News for Shareholders

Famed investor Nelson Peltz has taken a stake of just over 1% in Starbucks (SBUX). At least there is finally someone there who makes the stock (and company) interesting.

Recently, the billionaire has bought large stakes in Wendy's (WEN), Kraft (KFT) and H.J. Heinz (HNZ) through his hedge fund. Peltz then pressured management to make changes aimed at improving profit margins and lifting stock prices. Typically, Peltz pressures the companies to focus on the core of their businesses and divest less-profitable endeavors.

Based on that alone one can expect the "Entertainment" division of Starbucks to be first on the chopping block. Rather than producing albums and books, let's just get the coffee thing going in the right direction.

Starbucks is coming off a Q2 that saw net income fall 28% and its same store sales at U.S. locations fall by their widest margin ever. Management is going to have a really hard time dismissing any ideas Peltz puts forward based on both their current track records lately.

This is really good for shareholders. If nothing else, Peltz will remind them of what the chain really is supposed to be, a coffee house. Not a book and record producer. Not a coffee machine retailer. Not a baker and so forth. Just do coffee and do it very well and people will return.

Here is another idea. Why not franchise? It may be a bizarre control thing in Seattle but it works just fantastically for every other multi-location food retailer (and yes, that is what you are). Franchise fees alone would add to the bottom line while reducing costs, freeing up money (not for expansion) for buying back shares or actually giving shareholders a dividend. They deserve something after the last 18 months. Hell, put 10% to 20% of the US stores up for sale to "master franchisees" and watch the offers come pouring in.

It would work.....if they will just listen out there. Unfortunately this is not a given.


Disclosure: No position.

Comments

[wjewje]

There are many factors that contribute to the slide. Costs to do business have jumped big time. Just milk alone along with the cost for medical Ins. Get a grip. Books and music represent a small portion of gross sales and do not carry a large nut

[coffeejoe]

It seems the norm lately to bash Starbucks brand. If one would look at the factors effecting the business you would see that it is not all operations fault. The current state of the economy has really taken a toll, but as always Starbucks will bounce back. Starbucks had this same issue in varying degrees over the past 15 years or so. Starbucks has done great work in focusing on the coffee. The launch of Pikes Place Roast, yum! The laser focus on espresso quality and blended quality. Entertainment has already been handed over to a Starbucks business partner and never had a negative effect in the stores. Music, books, and coffee go together. A coffee shop is about generating conversations and the sharing of ideas. Starbucks is not McDonalds but a community happening. I think many of the problems Starbucks got into were caused by trying to be something else other than a coffeehouse. Howard Shultz realized that over a year ago when the infamous email circled the net. The cost of business has gone up, people are not coming as frequently, and the economy is struggling. Starbucks will see this through as they always have, one cup at a time.

[PhillyD]

Todd must have been reading my suggestion on their website! :)

They need to Franchise for multiple reasons:

1- increased cash flow immediately
2- lower the cost of expansion thereby expanding in South America and China can happen IMMEDIATELY. If they don't ... someone else will.
3- get a more dedicated staff towards promoting and implementing the "experience" ... whatever that morphs into being. I went to a local deli-coffe house in Ann Arbor today. It was an experience! That's what having ownership on hand does for you. I am SHOCKED that Starbucks doesn't get it.

They resisted my offers for multiple franchises in NY/NJ some 10 years ago. Very prideful and cocksure. Now not so prideful as their stock (and net worth) has tanked.

I would love to invest a boatload here at this price but am not confident in their management.