Shares of Starbucks(NASDAQ: SBUX) soared nearly 25% after the coffee chain announced that it was replacing its CEO with Brian Niccol, the current CEO of Chipotle Mexican Grill(NYSE: CMG). Niccol will officially begin his new job on Sept. 9.
While this move certainly has had a positive effect on the stock in the near term, let's look at why it should be good for investors over the long term as well.
Turnaround needed
It's no secret that Starbucks had been struggling under (now former) CEO Laxman Narasimhan. Its same-store sales in the U.S. had turned negative, and there were both customer and worker complaints over stores not being fully staffed and long wait times. Meanwhile, its second-largest market, China, has been under pressure from increased competition and a general lackluster consumer environment in the country.
The company's stock price and struggles drew in activist investment shop Elliott Management, which had been having active discussions with the company's board on how to help fix its issues. Meanwhile, former CEO and largest shareholder Howard Schultz no longer seemed on the same page as Narasimhan, whom he picked as his successor.
Schultz said that Starbucks needed to focus on coffee and improve its customer experience. Narasimhan, meanwhile, had been busy touting the company's non-coffee drinks, such as boba and a new energy drink, while looking toward technological improvements to speed up wait times. Thus, it perhaps should not be surprising that Narasimhan has been replaced.
Image source: Getty Images.
In steps Niccol
What is surprising, however, is that Starbucks was able to wrangle Niccol away from Chipotle. Niccol had been CEO of Chipotle since 2018 and helped turn the company around following the food borne illness issues the restaurant experienced before he came on board. Since then, he has helped lead Chipotle to continued strong same-store results year in and year out.
Now Niccol's tenure with Chipotle hasn't all been smooth, as the company has recently come under fire from customers for inconsistent portion sizes. Last quarter, the company said this came from about 10% of its locations underserving customers and that these stores would be retrained. However, the restaurant chain also warned that this would lead to some near-term margin pressure moving forward.
Niccol will also be facing some very different issues than the ones he had to deal with at Chipotle. For one, part of Chipotle's success and high margins stem from its small menu with a limited number of ingredients that workers make orders from in assembly-line fashion. Starbucks, on the other hand, is known for making a large range of drinks, many of which are customized, and its customer experience. It's a completely different atmosphere.
Chipotle also does not have a large international presence like Starbucks, as it is currently a mostly U.S.-based chain. Prior to Chipotle, Niccol was the CEO of Taco Bell, owned by Yum Brands (NYSE: YUM). While this is also a predominantly U.S. brand, there were around 300 locations in 26 countries outside the U.S. when Niccol was at the helm. However, since the first Chinese Taco Bell opened in 2017 under Yum's spin-off Yum China(NYSE: YUMC), shortly before Niccol left, the new CEO likely has very little experience dealing with the Chinese market.
However, he would have been around when Yum spun off Yum China. Spinning off Starbucks' China operations has been floated around by Elliott. Don't be surprised if Niccol and the board decide to take a similar step sometime next year.
Is it time to buy the time?
Starbucks needed a change at the top, and Niccol is a great get. He has a lot of restaurant experience and helped successfully turn around a great brand that, at the time, was dealing with a reputation hit after a series of food poisoning incidents. While Niccol was not at the helm when Chipotle revamped its mobile app late in 2017, he did help oversee the huge success the company saw with mobile ordering and continued to improve upon it with a focus on personalization to keep more casual customers engaged.
He helped implement a number of automation initiatives to help create efficiencies and speed up orders, something Starbucks has begun rolling out. He also invested in technology to help deal with staffing and restaurant traffic. These are all problems Starbucks is currently looking to fix.
Following the spike in its share price, Starbucks trades at a forward price-to-earnings (P/E) ratio of about 23 based on next year's analyst earnings estimates. That's still below where the stock has generally traded over the past few years.
SBUX PE Ratio (Forward 1y) data by YCharts.
While it's not a guarantee that Niccol will come in and be Starbucks' savior, he does have a strong track record in areas where the company needs to improve. With the stock still trading at a reasonable valuation, it does not look too late for investors to buy the stock for the long term.
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Geoffrey Seiler 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.
