A latte problems at Starbucks: Class-action lawsuit filed

When it comes to Wall Street, not meeting earnings expectations isn’t a good thing, but it rarely leads to lawsuits. In this case, Starbucks is being sued for presenting an overly rosy picture of the company’s financial position last November.

According to Restaurant Business, Starbucks executives may have misled investors by making unrealistic projections on sales and earnings.

A shareholder filed the class-action lawsuit in federal court Wednesday. The lawsuit covers the period from Nov. 2, 2023, when the Seattle-based company announced its earnings projections for 2024, to April 30, when those projections fell well short of expectations.

The company lowered its full-year projections, including a 4% decline in same-store sales worldwide, driven by a 6% decline in transactions. This led to a 15% drop in the company’s stock price that day.

Re-introduced products: Starbucks ushers in fall early with the return of the Pumpkin Spice Latte

“We view the issue related to competition as synonymous with questions related to the health of Starbucks’ brand, as frankly lower-priced coffee has always been available in every one of Starbucks market and has not impeded Starbucks’ success,” an analyst from William Blair said in the lawsuit, Restaurant Business reported.

The case focuses on comments made by company executives, including former CEO Laxman Narasimhan and CFO Rachel Ruggeri, during a November presentation. The “Triple Shot Reinvention with Two Pumps” strategy was marked by aggressive sales and earnings projections, driven by operational changes and anticipated growth in China, Starbucks’ second-largest market.

However, by January, Starbucks also warned about declining U.S. sales, which had started falling in November. Despite this, executives continued to tout improvements in China. The lawsuit claims Starbucks was “ill-equipped to handle the existing macro uncertainty and competition, particularly in the Chinese market,” and misled investors with flawed statements of confidence and growth projections between November 2023 and April 2024.

Analyst reports indicated that the public placed significant weight on Starbucks’ previous statements of confidence in their plan. The earnings call prompted widespread criticism from the business media, investment communities, and even Schultz, who had handpicked Narasimhan as CEO.

In response, Starbucks hired Brian Niccol from Chipotle Mexican Grill as its new chairman and CEO, offering him a substantial bonus and more control than any previous CEO not named Schultz. Niccol’s hiring has since led to a recovery in the company’s stock.

Related news: Starbucks CEO could make $100M while working remotely

The lawsuit also highlights the significant impact of the China market on Starbucks. While executives warned about U.S. sales in January, they boasted about progress in China. However, China’s same-store sales declined 14% in Starbucks’ fiscal third quarter, as customers ordered cheaper items and visited less often, amid increased competition from local companies offering cheaper coffee.

In response to this filing, Starbucks sent KIRO 7 the following statement:

“The allegations in the complaint are without merit. Starbucks takes great care in communicating transparently and authentically with its stakeholders, including its investors, partners, customers, and community.”

Contributing: KIRO 7 News

Bill Kaczaraba is a content editor at MyNorthwest. You can read his stories here. Follow Bill on X here and email him here.