A class action lawsuit was filed against Starbucks Corporation (SBUX) by Levi & Korsinsky on August 28, 2024. The plaintiffs (shareholders) alleged that they bought SBUX stock at artificially inflated prices between November 2, 2023 and April 30, 2024 (Class Period) and are now seeking compensation for their financial losses. Investors who bought Starbucks stock during that period can click here to learn about joining the lawsuit.
Starbucks operates a chain of coffee stores across the globe in about 87 markets. The company also has five roasting, manufacturing, and distribution plants in the U.S. and abroad.
Starbucks’ tall claims about the demand for its premium coffee, related sales, and buoyant operations in China are at the heart of this complaint.
Starbucks’ Misleading Claims
According to the lawsuit, Starbucks and two of its senior officers and/or directors (Individual Defendants) repeatedly made false and misleading public statements throughout the Class Period. Particularly, they are accused of omitting truthful information about a certain business strategy and ancillary issues from SEC filings and related material.
For instance, during anearnings callat the beginning of the Class Period, the CEO stated that the company’s Reinvention strategy was moving as expected and helping boost revenue growth, efficiency, and margin expansion. He added that the positive outcome of the strategy was visible in partner and customer experiences and that he remained confident of continued business momentum despite macro uncertainty.
Furthermore, during anearnings callon January 30, the CEO reiterated the effectiveness of the Reinvention investments and their positive impact on in-store operational efficiencies, resulting in an improved operating environment for partners.
In the same call, the CEO mentioned the ongoing momentum in the Chinese market and set forth Starbucks’ ambition to become the leader in the premium coffee market. The CEO also said that based on their brand tracker, Starbucks remains a coffee house of choice in away-from-home coffee, including for Gen Z customers. Also, he noted that Starbucks had a leading score in terms of brand affinity, highest awareness, brand familiarity, and purchase intent.
However, subsequent events (discussed below) revealed that Starbucks allegedly misled investors about its dominant position in the Chinese coffee market and set unreasonable sales targets.
Plaintiffs’ Arguments
The plaintiffs maintain that the Defendants deceived investors by lying and withholding critical information about the company’s business practices and prospects during the Class Period. Importantly, the Defendants are accused of misleading investors about Starbucks’ revenue expectations and resilient position in China’s premium coffee market despite the ongoing headwinds.
The information became clear after the markets closed on April 30, 2024, when Starbucks reported weaker-than-expected results for the second quarter of Fiscal 2024. Compared to Q2 FY23, the company’s store sales declined 4% globally, traffic fell 7%, and new revenues declined 2% to $8.6 billion.
What’s worse, Starbucks even cut its full-year Fiscal 2024 guidance, citing headwinds such as declining global store sales, net revenues, and earnings. Importantly, the company pointed to weak momentum in China for the falling revenues. The CFO noted that Starbucks was witnessing a slower-than-expected recovery in the Chinese market as well as stiff competition among value players, which was hampering its sales. Following the Q2 print, SBUX stock collapsed 15.9% on May 1.
To conclude, Starbucks allegedly misled investors about the demand and revenue expectations and its performance in the Chinese market. Year-to-date, SBUX stock has gained only 2.6% vis-à-vis a nearly 21% gain in the S&P 500 Index (SPX).
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