Starbucks shares soared in early Tuesday trading, potentially adding around $20 billion in market value, after the world's biggest coffee chain ousted the underperforming Laxman Narasimhan and tapped the fast-food veteran Brian Niccol of Chipotle Mexican Grill (CMG) as its new CEO.
Starbucks (SBUX) has been under pressure from activist shareholders over the past month, with Elliott Investment Management and Starboard Value reportedly taking stakes in the underperforming coffee chain and pushing for major changes in its management and operations.
That pressure intensified when Starbucks on July 30 posted muted fiscal-third-quarter earnings and said sales in key international markets, particularly in China, continued to decline.
The group held to its full-year forecasts of low-single-digit-percent gains for comparable U.S. sales, with a similar growth rate for overall profit. But investors were unimpressed by the turnaround efforts of Narasimhan's "Siren System" plan.
With the stock down more than 26% since Narasimhan was appointed to succeed interim leader and founder Howard Schultz in March of last year, and activists knocking on the door, Starbucks had to move fast.
Image source: Starbucks
Niccol, 50, will take over as CEO on Sept. 9, with finance chief Rachel Ruggeri serving as interim boss for the next four weeks and Narasimhan exiting his position on the board as well.
'Transformational step'
“I have long-admired Starbucks iconic brand, unique culture and commitment to enhancing human connections around the globe," Niccol said in a statement. "As I embark upon this journey, I am energized by the tremendous potential to drive growth and further enhance the Starbucks experience for our customers and partners, while staying true to our mission and values.”
Investors cheered the decision, both in terms of the group making a decisive move in changing its leadership and also tapping a key industry player with a proven track record.
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Elliott called the hiring of Niccol a "transformational step forward for the company and said it "looks forward to continuing our engagement with the Board as it works toward the realization of Starbucks' full potential."
Change happening incredibly quickly at Starbucks as activists turn on the heat. Niccol comes on board in under a month. Release glows about him with even Howard Schultz quickly throwing his ‘hand-picked’ successor under the 🚌. $SBUX $CMG pic.twitter.com/L7F9RNgXEn
— Rahul Sharma (@Retail_Guru) August 13, 2024
Others were similarly optimistic, citing Niccol's retail-focused skillset and hits track record at Chipotle.
"Niccol’s ability to drive visits was apparent during his time at both Taco Bell and Chipotle, spurred by new menu innovations, engaging marketing campaigns, and improved restaurant operations," said R.J. Hottovy, head of analytical research at Placer.ai.
"Chipotle has outperformed the quick-service restaurant space the past several years, and we’d expect new products and advertising campaigns to be a focus early in his tenure at Starbucks,” he added.
Nancy Tengler, CEO and CIO of Laffer Tengler Investments and an owner of both Starbuck and Chipotle stock, was also bullish. But she noted that while it was "great to see the board take action, ... they had to be prodded by activist investors.
"Brian Niccol worked magic at Chipotle," she said. "He did all the right things, and really drove the company through the use of Chipotle lanes, through the use of digitization, where they now get over a million dollars per store in digital orders. He's going to fix Starbucks."
New leader, new focus at Starbucks
"We've talked to some insiders at Starbucks that said Laxman just didn't understand retailing, any restaurant retailing, and he did not understand the Starbucks culture," she added. "I don't think Brian Niccol is going to make that mistake."
Baird analyst David Tarantino was the first Wall Street analyst to adjust his stance on Starbucks, lifting his rating to outperform from neutral and boosting his price target by $29 to $110 per share.
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"We believe Niccol brings a skillset that will prove valuable in strengthening internal operating fundamentals," Tarantino and his team wrote. "We now expect sentiment on the shares to remain positive even if operating results are lackluster for the next few quarters.”
Starbucks shares were last marked 21.2% higher in early Tuesday trading and changing hands at $93.4 each, a move that would be the stock's biggest-ever gain if it holds into the closing bell.
Chipotle shares, meanwhile, fell 11.8% to $49.28 each, a move that lopped more than half the stock's 2024 gain.
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