Billionaire fast food mogul Nelson Peltz has taken a stake in Starbucks (SBUX), prompting ebullient investors to send SBUX up 4.5% so far today. Deutsche Bank, however, remains unimpressed by Peltz’s bid, which it views as too small (898,500 shares or 0.1% of SBUX’s float) to be of any consequence, at least yet:
Although the potential for change that this type of investor could bring is encouraging, we note the investment is of a small size. Trian held 880k shares as of March 31, equivalent to 0.1% of SBUX shares outstanding. Today’s news does not alter our conservative view. However if Trian’s stake grows and it becomes actively involved with SBUX management, we could become more constructive…
DB then proceeds to outline some of the changes an activist Peltz would need to enact before SBUX could begin a true turnaround. The most important reform Peltz could implement would be to contain cannibalization and streamline ROA by reducing store growth rates and using fewer stores more efficiently. DB summarizes its position in three points:
(1) Reduction of store growth targets, which in our view remain far too high in light of declining US same‐store‐sales, cannibalization issues and declining returns. We believe a goal of actually closing US stores over the next few years (rather than opening 250 p.a.), and reducing International growth targets (+1,000 p.a.) is needed to improve the ROIC profile.
(2) More aggressive cost leverage initiatives. In addition to shrinking the store base, we would be encouraged by steps to streamline store operating costs and otherwise improve real estate leverage (i.e. new products).
(3) Redeployment/rationalization of capital, with far less capex for store growth. Where SBUX does decide to expand, it also needs to begin providing better explanation of returns which can be achieved.
DB maintains its Hold and $14 price target (below yesterday’s $16.07 closing price).
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