Starbucks may need more than an energy drink to reenergize its investors.
Pressure is mounting from activist investor Elliott Investment Management, which took an undisclosed stake in the company, according to a report from WSJ on Friday.
Following the news, Starbucks' stock price rose nearly 7% after market close, having fallen more than 21% in the past year. On Monday, shares opened lower, down roughly 3%.
Citi analyst Jon Tower told clients in a note that this stake "should come as little surprise to investors." The chain's shares fell 14% following its Q2 earnings results, when it reported its first quarterly sales decline since 2020.
Elliott did not return a request from Yahoo Finance for comment, while Starbucks told Yahoo Finance it does not "comment on rumor speculation.”
Investors are worried about Starbucks' ability to reverse declining foot traffic in the US, compete on innovation and promotions, improve operations, and reverse flagging China sales.
Now, Wall Street is weighing what Elliott would focus on and what it could mean for the stock.
"A fix will not prove easy, with more difficult decisions likely necessary around the growth algorithm, investments and core market strategies that could potentially hit sales and profits. However, an activist presence likely provides a near-term floor for shares," Tower wrote.
"Investors have questioned Elliott’s experience and track record in the consumer sector, we believe that an external nudge may accelerate making bold decisions and may offer interesting risk-reward opportunities for long-term investors willing to accept that a turnaround may take time," Bernstein analyst Danilo Gargiulo wrote in a note to clients.
Here are 10 items Gargiulo believes the Elliot team would prioritize.
In the previous quarter, Starbucks' US foot traffic dropped 7%, which "shocked a lot of people," BTIG analyst Peter Saleh told Yahoo Finance. Reaccelerating US traffic is "the key criteria for stock appreciation" in the medium term, TD Cowen analyst Andrew Charles said in a note to clients.
In May and June, the chain introduced boba-like pearls and energy drinks, plus a promotional pairing menu. For $5 or $6, customers can get a small iced or hot coffee with a butter croissant or breakfast sandwich.
"We'd like to see some progression, or some sort of confidence that ... [foot traffic] is going to improve here," Saleh said regarding the new menu offerings.
Gargiulo said that his team likes both beverage launches and expects "further investments in product innovation to draw traffic back to stores" and to reach a Gen Z audience.
But the value deals may "dilute the brand perception" of being premium "in the long-run," Gargiulo added in his note.
Fixing its image is another challenge. Its widely discussed price increases are roughly in line with or even slightly below the industry, said Saleh, but the brand has struggled to kick its bougie perception.
"I'm not really convinced that they have a real value issue at Starbucks ... They had a social media issue with the boycott" that kicked off last fall, per Saleh.
In October, its union group Starbucks Workers United posted "Solidarity with Palestine!" on X, formerly known as Twitter, which some consumers interpreted as Starbucks' support for Hamas.
Starbucks condemned the notion, but the perception already sparked a boycott, prompting CEO Laxman Narasimhan, who stepped into the role in March 2023, to issue an internal memo.
Improving in-store operations, particularly during busy times, is another must. The company has been implementing the Siren system, a new operational system designed to improve order speed and throughput.
By the end of May 2024, more than 1,000 US stores had begun trying the new system.
Starbucks needs to "accelerate the roll-out of Siren system that addresses the on-grounds issues of barista and store partners and beef-up back-of-the house operations for digital orders," like a second makeline similar to Chipotle (CMG), Gargiulo said.
Improving results in its second-largest market, China, is also needed.
Last quarter, China saw the biggest drop of all Starbucks segments, with same-store sales down 11%, foot traffic down 8%, and the average ticket size down 4%.
"Performance was impacted by a decline in occasional customers, changing holiday patterns, a high promotional environment, and a normalization of customer behaviors following last year's market reopening," Narasimhan said on the call with investors.
In a note to clients, Bank of America analyst Sara Senatore said Starbucks' performance in China is tied to industrywide struggles.
"Intense competition is the natural state of restaurant markets and even the strongest brands are not insulated," she said. "The direction of SBUX's China same-store sales growth is strongly correlated with those of other global brands. And all are correlated with macro factors (GDP)."
Gargiulo believes franchising may be the way to go in the market with an "equally compelling alternative to leverage buildout of one of the biggest coffee market without the capital allocation" and less exposure to "fluctuating macro-economic conditions."
The company still aims to have 9,000 locations in China by 2025.
All these efforts may not be quick enough for shareholders.
In a note from Morgan Stanley, analyst Brian Harbour wrote that most would agree with Starbucks management's Q2 comments that a turnaround would take time, which is "clouding the near-term investment case."
A rebound in sales and earnings could be in the works for fiscal 2025, but "the stock would seem to discount this taking much longer," Harbour added.
Tower shared a similar sentiment in a client note.
"Bears clearly control narrative, though this could shift should top-line momentum turn and, or the company articulates a clear plan around cost cuts, Siren remodels and, or China," he wrote. "Absent the above, we see little investor appetite to re-engage shares, leaving room for shares to continue to lag market and peers."
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].