SBUX Starbucks Corporation

By 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. company-operated 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 well-known 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.

Write to Cara Lombardo at cara.lombardo@wsj.com and Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

October 09, 2018 19:54 ET (23:54 GMT)

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