Starbucks stock skyrocketed 18% at the market opening on Tuesday, 13/08, and added another 6% during the day, leading to the most significant one-day stock price increase since Starbucks became a publicly traded company in 1992. This happened because the Company announced that its current CEO is stepping down from his position, and Brian Niccol will take over on September 9th. Who is Brian Niccol, and will he solve all of Starbucks's problems? Starbucks stocks have been struggling since April 2023, when lowered consumer discretionary spending in the US led to weak demand and dispirited investors. Before yesterday's jump, Starbucks stock had lost 36% of its value over that period.
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Source: Tradingview.com
Consumers cutting on discretionary spending
Consumers may be limiting their afternoon pick-me-up cup of coffee (or at least making it on their own), expressing their fatigue from the ever-growing prices.
The latest quarter sales ending on June 2024 continued disappointing Starbucks' investors, although not as much as feared. While lower than a year ago, the key financial data came out better than investors expected. The Company reported the adjusted EPS at 0.93 USD versus the expected 0.92 USD, leading to a 6% boost in the stock price. However, the hype was short-lived, and the stock price fell back to its pre-earnings level in 2 days. More company-specific data also showed challenges in its home market, the US. In the latest quarter, same-store sales declined by 2%, and foot traffic dropped by 6%.
Source: Starbucks financial statements
According to analysts, Starbucks' challenges may be linked to broader cyclical macroeconomic factors and may lead to weaker sales in most of fiscal 2024. The 2024 forecasts have already been adjusted for the third time this year. The Company reported anticipated global revenue growth in the low single digits for 2024, a reduction from the earlier projection of 7% to 10%, which was previously cut from an original estimate of 10% to 12%.
Starbucks sales have declined not only in the US but also in its second-largest market, China, which is experiencing the most significant decline among all regions. Same-store sales dropped by 14% compared to the last quarter, which had already seen an 11% decrease. Both foot traffic and average transaction value in China fell by 7%. The Company has attributed this downturn to higher consumer caution along with increased competition over the past year.
The whole discretionary sector suffering
Starbucks is not the only discretionary Company affected by the cautioned spending habits. Discretionary stocks have underperformed the overall S&P500 index by 15 percentage points or more than 3 times in the last 12 months (+21.74% for the S&P500 versus +6.72% for the S&P500 Consumer Discretionary sector). Meanwhile, the difference between the year-to-date performance of both indices is even larger: +13.93% for the S&P500 versus +0.73% for the S&P500 Consumer Discretionary sector.
Source: S&Pglobal.com
The new Starbucks CEO, Brian Niccol
Activist investor Elliott Investment Management has been pressuring Starbucks to make some changes amid falling sales. Brian Niccol may be one of the changes the activist investor had in mind. Until now, Brian Niccol was the CEO of Chipotle, previously holding a leadership position at Taco Bell. Under his stewardship, Chipotle's stock price increased by an impressive 773%. He played a key role in helping the chain recover from a foodborne illness crisis and successfully guided the restaurants during the pandemic. Recently, while many other restaurants faced a significant decline in consumer spending, Chipotle has experienced growth in traffic and sales, defying the overall trend.
One of Chipotle's key advantages during Niccol's leadership has been its mobile app, which has significantly contributed to the Company's robust performance in recent quarters. In contrast, Starbucks' app has been criticized for its disappointing results. Starbucks' former CEO, Howard Schultz, and other critics of Starbucks have highlighted the excessive number of mobile orders leading to delayed service and a negative impact on the customer experience.
Should you jump on the “Starbucks train”?
Starbucks' stock price jump indicated that investors may believe in Brian Niccol and his power to turn around the Company's recent distress. Combined with his success in growing Chipotle's stock price up 773%, investors may be inclined to jump on the "Starbucks train of success" while its stock is still trading below 100 USD.
While it was certainly nice to wake up at the stock up around 20% on Tuesday morning for those investors already owning Starbucks stocks, let us look at the critical valuation figures to understand whether it would still be reasonable to purchase them now.
As Starbucks stock depreciated over the last year, its valuation multiples were lower than the average multiples of the S&P500 Consumer discretionary companies, suggesting a certain attractiveness. However, after the most recent jump, Starbucks stocks no longer look as attractive. Both Price-to-Earnings and Price-to-Sales ratios are now just above the sector average numbers.
Source: finance.yahoo.com, eqvista.com, author calculations
Another valuation multiple, Price-to-Book value, was not calculated as the Company has accumulated large amounts of debt, leading to a book value of -8 billion USD and negative shareholders' equity. The massive debt may also be a reason to think twice before investing in Starbucks.
Furthermore, more often than not, such gaps in stock and other financial instrument prices tend to close over time, meaning that once the initial hype around the new CEO settles, Starbucks' stock price may lower to previous levels.
Conclusion
Brian Niccol may just be the breath of fresh air Starbucks needs after changing the CEO for the fourth time in two years. His previous achievements in similar consumer discretionary companies suggest that Starbucks may soon experience positive changes, including growth in its stock price.
However, Starbucks operates in a relatively saturated market with numerous lower-cost competitors and consumers looking to skip another cup of overpriced coffee. Furthermore, Niccol may be facing different challenges with Starbucks as it has a more complicated structure and much more international presence than Chipotle.
It may be interesting to watch whether the new CEO will try to lower the amount of debt obtained by Starbucks in the past; however, for now, the negative book value might be a reason for some investors to decide not to invest in Starbucks shares.
Furthermore, the Company still needs to stop its decreasing sales and profitability ratios to improve its attractiveness among investors. Until that happens, a new CEO may not be a good enough reason to decide on investing in a company that just became 24% more expensive to own.
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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