The shock announcement of Chipotle CEO Brian Niccol taking the helm of Starbucks following former boss Laxman Narasimhan’s departure was a much-needed jolt to the coffee giant’s stock: Company shares were up 22% the day after the news, with investors rallying around the potential for a turnaround in Starbucks’ slump.
The cause for celebration may be a little premature, Jefferies analysts believe. In a Monday note, Jefferies managing director Andy Barish downgraded Starbucks’ stock to a rare hold and cut the company to underperform, the equivalent of a sell rating. It’s the first time the analyst has given a sell-equivalent rating since beginning to cover the company in 2011, according to Bloomberg data.
The hype reflected in the company’s stock price and valuation immediately following Niccol’s promotion was “overdone,” according to Barish and his colleagues. Starbucks still has a long road to recovery. He predicted the stock dropping 20% over the next 12 months, setting a target price of $76 from Monday’s closing price of $95.48.
“We find this gain to be too much too soon when very little is known about Mr. Niccol’s plans so early in his tenure, which just began weeks ago,” Barish said in the note.
After taking the helm of Starbucks on Sept. 9, Niccol wrote in an open letter his plans to boost the company in his first 100 days as CEO, including intentions to bolster its supply chain, better differentiate between “to-go” and “for-here” orders, and improving order times. Starbucks, the world’s largest coffee chain, has struggled recently with slumping sales, in part because of Starbucks app users abandoning orders over long wait times, as well as a stubbornly cautious consumer. While Niccol has a plan to address these challenges, Jefferies analysts are convinced these improvements will not happen overnight.
“While the new CEO suggests necessary strategic change is now on the table,” Barish said, “we believe execution will be challenged as issues like ops, culture, value perception and tech take time to fix.”
Starbucks is steeped in challenges
Niccol’s predecessor Narasimhan did little to inspire Starbucks’ activist investors, despite him being handpicked by founder Howard Schultz for the role. Following a lackluster quarter for the company in May, Schultz wrote on LinkedIn that Starbucks should “own the shortcoming without the slightest semblance of an excuse,” blasting the company and Narasimhan—who had been in the role only 17 months—by default.
With rising Middle East tensions causing boycott-fuelled sales slumps, as well as customer frustration over hiked-up prices and union workers waiting at the bargaining table, Narasimhan left Niccol with a full plate of issues to be addressed.
But Niccol’s track record of improving restaurant operations is what instilled such confidence from investors in the first place. Taking the reins at Chipotle as it reeled from the impact of an E. coli outbreak hospitalizing 20 customers, Niccol rebranded the fast-casual chain as a culinary-forward company. He pushed limited-time foods, introduced efficient digital ordering to Chipotle, and set the goal of doubling its U.S. restaurant count to 7,000. That was over the course of his six-year tenure as CEO. Two weeks into his new role, Niccol has to set lofty goals to be Starbucks’ savior.
“We’re refocusing on what has always set Starbucks apart—a welcoming coffeehouse where people gather, and where we serve the finest coffee, handcrafted by our skilled baristas,” Niccol said in his open letter. “This is our enduring identity. We will innovate from here.”