He can take his experience from running other multinational restaurant chains to create value for Starbucks shareholders.
Huge news hit the restaurant space this month. Brian Niccol, the CEO who righted the ship at Chipotle, announced a surprising job switch to become the CEO of Starbucks (SBUX 1.72%). Starbucks made this move quickly with the help of its board of directors and ex-CEO Howard Schultz due to deteriorating financial performance at Starbucks locations around the globe.
Investors applauded the move, sending Starbucks stock up over 20% in the days following the announcement. There are big expectations for Niccol, a man who built the modern Taco Bell and Chipotle brands. But I think investors are underrating a potential development that could unlock value for Starbucks shareholders, a move that Niccol was a part of when he worked at Yum Brands (owner of Taco Bell).
Here’s my prediction for the big move Brian Niccol will make once he gets settled in at Starbucks and why it can help unlock value for the stock.
Brian Niccol: The restaurant brand fixer
Who is Brian Niccol? The long-standing executive worked his way up at Yum Brands, eventually becoming the CEO of Taco Bell in 2015. During this time, he introduced the “Live Mas” marketing tag line and the Doritos Locos tacos, which were huge successes for Taco Bell. Generally, the division for Yum Brands thrived under Niccol.
Around the same period, Chipotle went through a huge rough patch after multiple salmonella outbreaks happened at its restaurant locations. Chipotle prides itself on having fresh, never-frozen ingredients. This makes the food taste better but introduces more risks for food-borne illness. A salmonella outbreak is obviously bad for a restaurant’s brand, and traffic at Chipotle locations suffered as a result.
Then, in 2018, Chipotle made the move to hire Brian Niccol away from Taco Bell to become Chipotle’s CEO. Since then, Chipotle has been one of, if not the best-performing, restaurant stocks out there. Same-store sales growth — which measures growth at existing restaurants — has been consistently high, with strong traffic and delivery sales performance. Since the beginning of 2018, Chipotle stock is up 800%, outperforming the Nasdaq-100 index, which is “only” up 200% over that same time. The Nasdaq-100 Index tracks some of the largest U.S. technology companies, such as Nvidia, making it a high hurdle rate for any stock to beat. The fact Chipotle is crushing this index is a testament to how strong a manager Brian Niccol was for the brand.
Learning from Yum Brands and China
Starbucks investors are hoping Brian Niccol can bring his playbook to Starbucks, which is currently struggling with same-store sales. In North America, same-store sales fell 2% year over year last quarter, driven by a 6% decline in transactions. China looks even worse, with an ugly comparable sales decline of 14%. These two markets are vital for Starbucks as they make up over 61% of the company’s global stores.
China is supposed to be a growth market for Starbucks. However, due to government interventions in the economy and hypercompetitive upstarts such as Luckin Coffee, the segment is struggling mightily. The 7,306 stores in the country are a huge drag on the company right now.
This is why I think Brian Niccol will spin out the Starbucks China business as its own separate company. Yum Brands did this with Yum China, earning a small royalty for using the company’s branding. This helped the Yum China subsidiary to develop a better relationship with the Chinese regulators and allowed management to focus on tailoring the business specifically to the Chinese market.
Starbucks could see the same benefits from spinning out Starbucks China. This wouldn’t be unusual for the company when operating overseas. For example, Starbucks already has the Mexican company Alsea Group, which runs its locations in Central and South America. This could be an easy way to fix the bleeding with the Chinese subsidiary, which is why I think Niccol will make the move within a few years.
SBUX Operating Margin (TTM) data by YCharts
Is Starbucks stock a buy?
Whether this prediction comes true or not, Niccol and the Starbucks team still need to fix the North American business. Customers have complained about long wait times in the morning when ordering through the app and a robotized experience when making a Starbucks run. This is far away from the historical Starbucks experience that welcomed people for meetings, dates, and a third place for work.
I do not know what specific things Starbucks will do to get the business back on track. But I don’t have any experience running a restaurant. Brian Niccol does. Given his track record at Taco Bell and Chipotle, investors should have confidence that he can improve Starbucks’s financials.
Today, Starbucks has a price-to-earnings ratio (P/E) of 26.2. For a mature business, this does not look dirt cheap. This may not capture the big picture, and the fact that Starbucks is facing declining operating margins, which have fallen to 15% vs. closer to 20% before the pandemic. If profit margins improve (something Niccol did wonderfully at Chipotle, by the way) and revenue starts growing again, Starbucks could grow its earnings at an impressive rate over the next five years, making the P/E of 26 come down rather quickly vs. current prices.
Take everything together, and I think now is a good time to buy Starbucks stock if you believe in the brand and Brian Niccol’s expertise in running restaurants.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Luckin Coffee, Nvidia, 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.
