From Dec. 31, 2023 to Aug. 13, 2024, shares of Starbucks(NASDAQ: SBUX) cratered by 20%. A combination of declining sales and waning customer loyalty had investors souring on the luxury coffee maker. But on Aug. 14, everything changed at Starbucks. The losses experienced throughout 2024 were essentially wiped as the stock rocketed as high as 26%.
So, what happened?
Let's dig into everything that's going on at Starbucks right now. There are a lot of moving pieces, but investors have many reasons to believe that the turnaround Starbucks needs has arrived.
What just happened at Starbucks?
Over the last several weeks, financial journals have been reporting that multiple activist investors have acquired meaningful ownership stakes in Starbucks. Activist investors try to identify value opportunities at businesses that are struggling. In the case of Starbucks, Elliott Management and Starboard Value both took sizable positions in Starbucks and have quietly been working with the coffee chain's board of directors behind the scenes -- and now investors know why.
Image source: Getty Images.
Why did Starbucks hire Brian Niccol?
The first major change coming to Starbucks isn't a new drink or snack. Instead, Starbucks parted ways with its CEO Laxman Narasimhan and replaced him with Chipotle Mexican Grill's CEO, Brian Niccol. Brian Niccol is a legend in the food industry. He first made a name for himself during his tenure at Taco Bell, which is a subsidiary of Yum! Brands.
Niccol really led a renaissance type of movement at Taco Bell. Initially hired to lead marketing efforts, Niccol was instrumental in building a strong social media presence for Taco Bell. This required a hefty investment in technology in order to gain deeper insights into Taco Bell's core customer demographics. These moves helped write a new chapter for Taco Bell, underscored by a series of new and innovative menu offerings to help drive renewed interest in the brand.
Given his success at Taco Bell, it's not entirely surprising to see why another Mexican-cuisine restaurant chain hired Niccol as its CEO. In March of 2018, Niccol took the reins at Chipotle. During his tenure at Chipotle, Niccol doubled down on his roots at the intersection of technology and marketing. He helped launch Chipotle's loyalty program in 2019, and nearly four years later, it boasts an estimated 40 million members.
Niccol has mastered the art of building brand equity through fierce customer loyalty. And while that's all well and good, the effect this has on a business shouldn't be underappreciated. By gaining deeper knowledge of customer preferences, Chipotle has been able to augment its menu with new items. The net result of driving renewed interest in the brand is repeat business.
As customers return to Chipotle, the company's same-store sales rise in tandem, which plays a big role in expansion efforts. Moreover, an increase in repeat buyers also translates into stronger unit economics. As the average customer became more profitable for Chipotle, the company experienced a noticeable shift in profit margins and cash flow.
CMG Gross Profit Margin (Quarterly) data by YCharts.
It's no wonder Chipotle stock has returned well over 700% during Niccol's time as CEO.
Is Starbucks stock a good buy right now?
I'll admit right off the bat that just a couple of weeks ago, I put forth the idea that Starbucks stock was going to be a clunker for the next several years. In all honesty, I just didn't think activist investing was the answer to Starbucks' problems. The consumer discretionary market is highly competitive, and the current state of the economy doesn't suggest that people are eager to part ways with their hard-earned money for a pricey cup of coffee every day.
I'm now reversing course, and it's entirely due to Brian Niccol. His resume speaks for itself, and his track record at multiple restaurant chains shouldn't be seen as an anomaly at this point. While I'm partial to a pumpkin spiced latte, I think adding Niccol to the menu will end up being the best decision Starbucks has made. To me, Niccol is like the Swiss Army knife of CEOs. He understands marketing, technology infrastructure, data analytics, and financial health.
My long-run prediction is that Niccol will completely rejuvenate the Starbucks brand -- and, in turn, reignite the company's loyalty program. Should he successfully execute on that vision, Starbucks could be looking at some meaningful turnaround in its key performance indicators and operational growth metrics.
My one word of caution when it comes to investing in Starbucks stock is that right now, it is experiencing outsized momentum on the CEO transition news. Niccol will formally start at Starbucks on Sept. 9, which means any changes he implements likely won't show up in earnings reports until later this year or even next year.
This gives investors ample time to assess how Niccol is introducing change at Starbucks, and really understand what he's doing to win back customer loyalty.
Should you invest $1,000 in Starbucks right now?
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
