Is Starbucks(NASDAQ: SBUX) making a comeback? The industry leader has been dealing with one problem after another, and it's on its fourth CEO in four years.
However, the market is loving the installment of the new CEO, Brian Niccol, who started this week. Can he change Starbucks and send it soaring, or are Starbucks' best days over?
Why Starbucks has cooled off
Starbucks is far and away the largest coffee shop chain in the world, and it's one of the largest restaurant chains as well. It has nearly 39,500 global stores, with more than 18,000 located in North America, and it continues to open new stores at a rapid clip. It opened 526 net new stores in the 2024 fiscal third quarter (ended June 30), and it sees plenty of further expansion opportunities.
Starbucks came under pressure in the pandemic, and although it bounced back, the changes in trends revealed some holes in Starbucks' model. The company hasn't kept up with digital ordering trends, and baristas are having a hard time creating signature custom beverages at a satisfactory pace. It hasn't helped that Starbucks' products are pricey, and beverage drinkers might be cutting back on discretionary coffee purchases.
The company has also been dealing with employee discontent and heavy unionization efforts. Starbucks has 381,000 employees globally, and training and taking care of them is no easy feat. There's been political fallout as well.
Sales have been taking a hit. Total sales, inclusive of new stores, were down 1% from last year in the third quarter, while comparable sales declined 3%. U.S. comparable transactions were down 6%, taking the blame for a large chunk of the decrease. Operating margin narrowed by 0.6 percentage points, and earnings per share (EPS) dropped 6% to $0.93.
To be clear, Starbucks still has a popular, loved brand, as well as more than $36 billion in trailing-12-month sales. It's also highly profitable, with plenty of cash generation. In some ways, the problems the company has been experiencing are due to the high demand it fields daily from loyal fans; the Starbucks brand isn't broken, but its processes might be. There's so much to work with here, but that could change if issues are not straightened out soon.
An extra jolt of caffeine
Brian Niccol is the restaurant turnaround king. He did the same thing for Yum! Brands' Taco Bell as CEO before being recruited to work his magic at Chipotle Mexican Grill, where he built it into the foremost fast-casual dining chain, created incredible wealth for shareholders, and developed quite a name for himself. Investors have high expectations for what he can accomplish at Starbucks.
After just a few weeks getting to know the company and two days into the job, Niccol released a statement identifying four areas he's going to work on to bring back Starbucks' mojo:
- Empowering baristas with the time and tools to make customers happy.
- Creating excellent beverages and serving them on time.
- Enhancing the in-store experience.
- Retelling the company's story.
Niccol may be on the job as of this week, but it's going to take time for him to define all the systems to make this happen, and investors may not see real progress for several quarters. However, if the Federal Reserve cuts interest rates this month, Starbucks should benefit from a boost in consumer spending.
Heating up again
Starbucks stock is down 25% from its all-time high, but it's up 23% since the new CEO announcement. Starbucks also pays an excellent, growing dividend that yields about 2.4% at the current price, and it's not too late to benefit from the stock's passive income.
Investors are really excited about what Niccol can do. Considering Starbucks' global name brand, healthy assets, and continued opportunity, this could be just the start of a new phase for the coffee giant.
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Jennifer Saibil 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.
