Polen Capital recently published its Q2 investor letter – you can download a copy here. According to the letter, Starbucks Corporation (NASDAQ: SBUX) was the investment management firm’s largest detractor in the second quarter. The investor discussed the company in the letter. In this article, we’ll take a look at Polen Capital’s comment about Starbucks.
Starbucks was our largest detractor this past quarter. The business has seen a period of malaise in same-store sales growth, most notably in the United States over the last year. While difficult to parse the exact cause, management has seen that the most notable weakness is in the afternoon daypart which is when the “occasional” Starbucks customer drops in now and then. The My Starbucks Rewards (MSR) loyalty members are much more heavily skewed to the morning daypart due to their more habitual daily visits. While new beverage innovations are usually enough to keep the occasional customer coming back, it would be far better if Starbucks could convert them into MSR members where they can have better behavioral data on those customers to create personalized offers and rewards designed to increase their frequency. We believe that the company is now rightly focusing on taking the friction out of getting into the MSR loyalty program. There was weakness in China this quarter as well, which has not happened before and was unexpected.
In addition, Howard Schultz, Starbucks founder and chairman, and Scott Maw, CFO, stepped down. We believe the China issue mostly involves dealing with the peculiarities of coffee delivery, which is important in that country (ordering coffee online through a third party to pick up at Starbucks and deliver to you). On the management departures, we expected Howard Schultz to leave the board within the next year or so. As such, the timing was the only surprise to us. CFO Scott Maw is more surprising given he has only been CFO for a few years and he is relatively young. We suspect Kevin Johnson, Starbucks new CEO, is likely bringing in his own lieutenant. Overall, we remain confident there is more market share for Starbucks to conquer and believe these issues will prove to be temporary setbacks. But of course, our research continues.
Shares of Starbucks Corporation (NASDAQ: SBUX) are down 2.45% since the beginning of the year. However, the company’s stock has performed well over the past three months, with the share price increasing nearly 18%. Over the past 12 months, the stock has jumped 5.08%. SBUX has a consensus average target price of $58.04 and a consensus average recommendation of ‘OVERWEIGHT’, according to analysts polled by FactSet. The stock was closed at $57.27 on Wednesday.
Meanwhile, Starbucks Corporation (NASDAQ: SBUX) is a popular stock among many hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 42 funds in our database with position in the company, including Pacifica Capital Investments, Tyvor Capital, and Junto Capital Management.