Starbucks has already begun to see revenue declines in the U.S. since the start of this year, and its guidance for FY24 projects flat or single-digit declines in revenue growth.

Let's start by discussing the economic slowdown. Starbucks' revenue growth is often seen as an indicator of economic strength and consumer confidence. When the economic outlook is positive and consumers have higher disposable income, Starbucks typically experiences increased demand for its coffee. This is largely because Starbucks charges a premium for its products, making it a form of discretionary spending. During periods of high inflation and slower economic growth, however, Starbucks is often one of the first expenditures consumers cut back on to save money and focus on essentials.

This trend is evident now, as many Americans are reportedly coping with rising costs by flocking to discount retailers like Walmart and Costco to stretch their dollars. As a result, the Consumer Discretionary sector, which includes Starbucks, has been underperforming and is the only sector to have delivered a negative return year-to-date.

Starboard Value, another activist fund, has also reportedly taken a stake in Starbucks. It wouldn’t be surprising if both Elliott and Starboard push for board seats or solicit proxy votes to exert meaningful pressure on the management.

Typically, activist involvement is seen as good news, as these investors can help unlock value and boost share prices in favor of shareholders. However, there have been instances of failed attempts, such as with Disney, where multiple activists were involved but did not succeed. That said, I don't believe Starbucks' issues are as deeply entrenched as Disney's. Starbucks hasn't faced a disruption to its business model but rather more competition and the effects of an economic slowdown.

This poor stock performance is likely a key reason why shareholder activists have targeted Starbucks. According to the Wall Street Journal, Elliott Management has taken a significant stake in Starbucks since July and has been actively engaging with the company’s management to initiate a turnaround. We won’t know the exact size of Elliott’s stake until they file the 13F for the July to September period.

Finally, Starbucks shares have been sluggish, falling 18% year-to-date. However, this underperformance extends beyond just this year. Over the past five years, Starbucks stock is down 20%, while the S&P 500 has gained 85%. Even when factoring in dividends, Starbucks stock is still down 11%. While the surge in Big Tech and AI has certainly driven the S&P 500 significantly higher, the disappointment of holding Starbucks stock over the past five years remains undeniable.