Making sense of market moves
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The ongoing internal drama at Starbucks—involving activist investors, former CEO Howard Schultz, and the company’s board of directors—reached a swift but shocking resolution this morning. CEO Laxman Narasimhan is out, and his replacement is the man at helm of another fast casual chain likely positioned next to Starbucks in the mall food court: Chipotle’s Brian Niccol.
The move, which the coffee company announced this morning, boosted its share price like a hit of a double espresso. Niccol’s reputation in the corporate world precedes him from his legendary turnaround of Chipotle. After joining the company in 2018, he oversaw a period of explosive growth in which sales nearly doubled, profit increased seven-fold, and its stock gained about 800%. Investors are betting that Niccol can have the same magic touch selling coffee beans as he did burrito bowls.
Should you invest in Starbucks? Wall Street praised the leadership switchup, with Baird, Piper Sandler, and TD Cowen all upgrading their ratings of Starbucks today. Baird analyst David Tarantino, who elevated the stock from neutral to outperform, wrote that, “Niccol brings a skill set that will prove valuable in strengthening the internal operating fundamentals.”
And Starbucks sure needs that strength. The company has been floundering since a post-pandemic demand slump, but its business went from bad to worse ever since Narasimhan took the helm last March, as inflation and falling sales plagued the company. The stock has plummeted 21% since Narasimhan became CEO.
Analysts are also hoping that another heavyweight CEO will dampen the influence of former CEO Schultz, who has been “a question hanging over the stock,” according to Morgan Stanley’s Brian Harbour in a note this morning.
While analysts are optimistic about the coffee company’s trajectory, they acknowledge that there are still roadblocks ahead, especially in the next few quarters.
“Not only is Starbucks more than three times Chipotle’s size in revenue with a footprint spanning myriad countries, but current trends are also more challenged than when Niccol joined Chipotle,” wrote William Blair analyst Sharon Zackfia, who reiterated her “market perform” rating in a note today. She added that she expects Niccol to execute by “honoring the brand, focusing on operations/speed, amplifying marketing messaging, and implementing a strict stage-gate process for new product innovation.”
But what about Chipotle?
While Starbucks is gaining a star, Chipotle is losing one. Investors sold off the burrito maker’s stock today, fearing that the loss of Niccol would hurt the chain. Chipotle fell 7.50% today.
But analysts argue that the company’s leadership team is more than just one man, and in fact, Niccol is leaving the company with a rock solid team he helped build. “Despite today’s news, we remain confident in Chiptole’s trajectory given deep management expertise,” wrote Zackfia, who maintained her outperform rating.—LB