Prediction: Starbucks’ new CEO will eventually make this big move

Huge news hit the restaurant space this month. Brian Niccol, the CEO who righted the ship at Chipotleannounced a surprising job change to become CEO of Starbucks (SBUX 1.72%). Starbucks made the move quickly with the help of its board and former CEO Howard Schultz due to the deteriorating financial performance of Starbucks locations around the globe.

Investors cheered the move, sending Starbucks stock up more than 20% in the days following the announcement. Expectations are high for Niccol, a man who built modern brands Taco Bell and Chipotle. But I think investors are underestimating a potential development that could unlock value for Starbucks shareholders, a move Niccol was 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 settles in at Starbucks, and why he can help unlock the stock’s value.

Brian Niccol: The Restaurant Brand Fixer

Who is Brian Niccol? The longtime executive worked his way up at Yum Brands, eventually becoming CEO of Taco Bell in 2015. During that time, he introduced the “Live Mas” marketing line and Doritos Locos tacos, which were huge hits for Taco Bell. . Overall, the division for Yum Brands has thrived under Niccol.

Around the same time, Chipotle went through a huge rough patch after several salmonella outbreaks occurred in its restaurants. Chipotle prides itself on fresh ingredients, never frozen. This makes the food taste better, but introduces more risks for foodborne illness. A salmonella outbreak is obviously bad for a restaurant’s brand, and traffic at Chipotle locations has 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 stock. Same-store sales growth — which measures growth at existing restaurants — was consistently high, with strong traffic and performance in delivery sales. Since the start of 2018, Chipotle shares are up 800%, outperforming Nasdaq-100 Indexwhich is “only” up 200% in the same time. The Nasdaq-100 index tracks some of the largest US technology companies such as Nvidiamaking it a high hurdle rate for any stock to beat. That Chipotle is crushing this index is a testament to how strong manager Brian Niccol has been for the brand.

Learning from Yum Brands and China

Starbucks investors hope Brian Niccol can bring his playing card to Starbucks, which is currently struggling with same-store sales. In North America, same-store sales fell 2% from last year, driven by a 6% drop in transactions. China looks even worse, with a nasty 14% drop in like-for-like sales. These two markets are vital to Starbucks as they account for more than 61% of the company’s global stores.

China should be a growth market for Starbucks. However, due to government interventions in the economy and hyper-competitive upstarts such as Luckin coffeethe segment is struggling strongly. The 7,306 stores in the country are a huge piece for the company right now.

This is why I believe Brian Niccol will spin off 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 develop a better relationship with Chinese regulators and allowed management to focus on tailoring the business specifically to the Chinese market.

Starbucks could see the same benefits from separating Starbucks China. This would not be unusual for the company when operating overseas. For example, Starbucks already has the Mexican company Alsea Groupwhich operates its locations in Central and South America. This could be an easy way to fix the bleeding with the Chinese branch, which is why I think Niccol will make the move in a few years.

SBUX Operating Margin (TTM) data by YCharts

Is Starbucks stock a buy?

Whether that prediction comes true or not, Niccol and the Starbucks team still have to fix the North American business. Customers have complained about long wait times in the morning when ordering through the app and a robotic experience when running Starbucks. This is a far cry from the historic Starbucks experience, which welcomed people for meetings, meetings and a third place for work.

I don’t know what specific things Starbucks will do to get the business back on track. But I have no experience in running a restaurant. Brian Niccol does. Given his track record at Taco Bell and Chipotle, investors should have confidence that he can improve Starbucks’ financials.

Today, Starbucks has a price-to-earnings (P/E) ratio of 26.2. For a mature business, this does not seem very cheap. It may also come as no surprise to the bigger picture that Starbucks is facing a decline in operating margins, which have fallen to 15% from nearly 20% before the pandemic. If profit margins improve (something Niccol did wonderfully at Chipotle, by the way) and revenue starts to grow again, Starbucks could grow earnings at an impressive rate over the next five years, making the P/E of 26 to decrease quite quickly compared to. current prices.

Put it all together, and I think now is a good time to buy Starbucks stock if you believe in the brand and Brian Niccol’s restaurant management experience.