Starbucks shares soared after naming new CEO. Will this move be profitable in the long run for investors?

Actions of Starbucks (SBUX -0.50%) rose nearly 25% after the coffee chain announced it was replacing its CEO with Brian Niccol, the current CEO of Chipotle Mexican Grill (CMG 0.67%). Niccol will officially start his new job on September 9.

While this move certainly had a positive effect on stocks in the short term, let’s see why it should be good for investors in the long term as well.

Return is needed

It’s no secret that Starbucks had been struggling under (now former) CEO Laxman Narasimhan. Its US same-store sales turned negative, and there were both customer and employee complaints about stores not being fully staffed and long wait times. Meanwhile, the second-largest market, China, has come under pressure from increased competition and an overall weak consumer environment in the country.

The stock price and the company’s struggles have attracted activist investment shop Elliott Management, which has been in active discussions with the company’s board about how to fix its problems. Meanwhile, former CEO and largest shareholder Howard Schultz no longer seemed on the same page with Narasimhan, whom he had chosen as his successor.

Schultz said Starbucks needs to focus on coffee and improve its customer experience. Narasimhan, meanwhile, has been busy promoting the company’s non-coffee drinks like boba and a new energy drink while pursuing technological improvements to speed up wait times. Thus, perhaps it should come as no surprise that Narasimhan has been replaced.

Image source: Getty Images.

In steps Niccol

What is surprising, however, is that Starbucks was able to lure Niccol away from Chipotle. Niccol has been Chipotle’s CEO since 2018 and helped turn the company around following foodborne illness issues the restaurant experienced before he came on board. Since then, he has helped lead Chipotle to strong same-store results year after year.

Now, Niccol’s tenure at Chipotle hasn’t been entirely without problems, as the company has recently come under fire from customers for inconsistent portion sizes. Last quarter, the company said that this came from about 10% of its locations not serving customers and that these stores would be requalified. However, the restaurant chain also warned that this would lead to some short-term margin pressure.

Niccol will also face very different problems than he faced at Chipotle. On the one hand, part of Chipotle’s success and high margins come from its small menu, with a limited number of ingredients that workers make orders from on the assembly line. Starbucks, on the other hand, is known for making a wide variety of beverages, many of which are customized, and for the customer experience. It’s a completely different atmosphere.

Also, Chipotle does not have a large international presence like Starbucks, as it is currently a chain primarily based in the US. Before Chipotle, Niccol was the CEO of Taco Bell, owned by Yum Brands (YUM 0.32%). While this is also a predominantly US brand, when Niccol was at the helm there were about 300 locations in 26 countries outside the US. However, since the first Chinese Taco Bell opened in 2017 under spin-off Yum Yum China (YUMC 1.22%)shortly before Niccol left, the new CEO probably has very little experience dealing with the Chinese market.

However, he would have existed when Yum spun off from Yum China. The spin-off of Starbucks’ China operations was supported by Elliott. Don’t be surprised if Niccol and the board decide to take a similar step sometime next year.

Is it time to buy time?

Starbucks needed a change at the top, and Niccol is a great fit. He has a lot of restaurant experience and successfully helped turn around a great brand that, at the time, was dealing with a battered reputation after a series of food poisoning incidents. While Niccol wasn’t at the helm when Chipotle upgraded its mobile app in late 2017, he helped oversee the huge success the company saw in mobile ordering and continued to improve it, focusing on customization to keep more casual customers engaged.

He helped implement several automation initiatives to help create efficiencies and speed up ordering, which Starbucks was beginning to roll out. It also invested in technology to help manage staff and restaurant traffic. These are all problems that Starbucks is currently trying to solve.

Following the rise in its stock price, Starbucks is trading at a forward price-to-earnings (P/E) ratio of about 23, based on analysts’ earnings estimates next year. That’s still below where the stock has generally traded over the past few years.

Data on PE SBUX report (1 year ago) by YCharts.

While it’s no guarantee that Niccol will come in and be Starbucks’ savior, he has strong experience in areas where the company needs to improve. With the stock still trading at a reasonable valuation, it doesn’t seem too late for investors to buy the stock for the long term.