Investor Alert: Starbucks' Legal Challenges Raise Questions About Stock Viability

Earlier this month, three Starbucks Corporation (SBUX) customers, Maria Bollinger, Dawn Miller, and Shunda Smith, filed a $5 million class-action lawsuit alleging discrimination in the U.S. District Court for the Eastern District of California against SBUX. Their argument centered around SBUX charging extra for non-dairy milk and unfairly targeting individuals with lactose intolerance – a condition that affects their ability to consume dairy.

The lawsuit alleges an "excessively high" fee, specifically a surcharge of $0.50 to $0.80, on beverages at SBUX that offer non-dairy and lactose-free options such as soy, almond, coconut, and oat milk. The Americans with Disabilities Act (ADA) considers lactose intolerance, a condition that impacts 30 million to 50 million Americans, as qualifying for disability status.

Plaintiffs contended that SBUX violated their rights under the ADA and California Unruh Civil Rights Act - an act prohibiting businesses from discriminating against state residents based on age, race, sex, and disability, among other criteria, because they charge extra for plant-based milk in their beverages.

However, an SBUX spokesperson emphasized that domestic customers indeed enjoy non-dairy options without any additional charges, stating that "In U.S. Starbucks stores, at no additional cost, customers can add up to four ounces of non-dairy milk to hot or iced brewed coffee or tea, cold brew and Americano beverages."

Such controversy could corrode consumer trust and loyalty, precipitating decreased sales and profitability. Should an indictment of violating anti-discrimination laws befall SBUX, substantial financial penalties combined with brand image damage are probable. These factors could significantly influence shareholder value over the long term.

Safety Concerns Threaten Reputation and Consumer Trust

Apart from the abovementioned conflict, the company is also grappling with other challenges. This month, the federal safety agency reported that it is recalling over 440,000 Nestlé S.A. (NSRGY)-manufactured SBUX-branded mugs sold during the winter holidays. The action follows numerous user complaints of burns or lacerations.

The U.S. Consumer Product Safety Commission stated that microwaving or filling the mugs with extremely hot liquid caused them to overheat or shatter, presenting burn and laceration risks

SBUX-branded mugs' recall due to safety hazards significantly threatens the company’s reputation and consumer trust. The incident could result in potential legal and financial repercussions and tarnish the company's image, consequently affecting future merchandise sales and its bottom line.

The Fallout From Controversies Over International Conflicts

Since Israel's military offensive in Gaza, global protests and grassroots boycott campaigns have impacted SBUX. After the company sued its workers' union over a social media post in October, an activist called to boycott SBUX products.

The chain accused that by using their company name and logo on X (previously Twitter) to express solidarity with Palestinians, Workers United had violated its trademark. In response, Workers United filed its court document, accusing SBUX of defamation, specifically suggesting that the union endorses terrorism and violence.

Due to the unresolved disagreement, SBUX found itself targeted by both pro-Palestine and pro-Israel protests. CEO Laxman Narasimhan acknowledged this in a year-end letter published highlighting vandalism instances experienced in global cities and within U.S.-based SBUX stores.

Denying political affiliations, SBUX rebutted social media rumors suggesting ties to governmental or military operations.

The escalating protests and boycotts could threaten the brand's reputation, sales, and consumer trust. These challenges could also affect SBUX's financial standing and future viability as it navigates the complexities of international conflicts and societal pressures.

Starbucks' Sales Woes and Investor Concerns

In its fiscal 2024 first quarter release, SBUX reported that global same-store sales had only risen by 5% year-over-year in the three months leading up to January. The company also downgraded its guidance, projecting an increase between 4% and 6% in global same-store sales for the full year of 2024.

On an earnings call, Narasimhan asserted that the company observed a negative impact on its business in the Middle East. He added that since mid-November, the chain's U.S. sales have also lagged, partly due to public "misperceptions" about SBUX's stance on the conflict.

Some analysts, however, attribute the sales slowdown to a broader decline in sentiment among U.S. consumers and an economic recovery stall in China – its second-largest market with approximately 6,500 outlets. They point out that others noticed this trend coincided with a new winter menu launch, which could have underwhelmed customers.

Furthermore, the Frappuccino provider recently admitted to an unsuccessful beta test of their non-fungible token loyalty website named Starbucks Odyssey. Concurrently, Executive Vice President and CFO Rachel Ruggeri chose to sell 3,221 shares on March 4, 2024.

Over the past year, Ruggeri sold 5,246 shares without making any purchases in the SBUX stock. Her transaction history reveals consistent selling patterns with no recorded insider buys within that period. On the other hand, ten insider sales occurred at the company during this same timeframe, indicating an overarching trend among its insiders.

Bottom Line

The coffee company has been committed to ethically sourcing and roasting high-quality arabica coffee since 1971, and it stands today as the world's premier specialty coffee roaster and retailer, with over 38,000 stores globally. However, shares of SBUX have plunged 4.8% over the past month.

While the company's reputation and legal standing might improve in the future, its present fundamentals appear weak. Thus, it could be wise to wait for a better entry point into the stock.