Starbucks (NASDAQ:SBUX) stock was one of the top performing stocks on the S&P 500 in August, as it rose roughly 26% for the month.
It really wasn’t due to performance, as the coffee chain missed revenue estimates in the fiscal third quarter. It had more to do with big changes at the top of the organization that excited investors and propelled the stock higher.
Let’s examine Starbucks’ big move, and if the gains are sustainable.
Excitement over new “transformative” leader
The primary catalyst for Starbucks in August was the hiring of their new chairman and CEO, Brian Niccol. If that name sounds familiar, it is because Niccol has led the resurgence of several restaurant chains.
Niccol is considered a marketing and branding expert who helped turn around the fortunes of Taco Bell during his tenure as CEO from 2011 to 2018, and then he moved over to Chipotle (NYSE:NYSE:CMG) to lead it through a period of incredible growth that saw its stock price generate an average annual return of about 26% over the past five years.
In his six years at Chipotle, the restaurant nearly doubled its revenue, while earnings increased 7 times over and stock price rose almost 800%.
Niccol is starting at Starbucks on September 9, and investors are hoping he can turn around the floundering coffee chain, which has struggled over the past five years. Starbucks stock has generated an average annual return of -1% over the past 5 years, as of August 30.
“His phenomenal career speaks for itself. Brian is a culture carrier who brings a wealth of experience and a proven track record of driving innovation and growth,” said Mellody Hobson, the current Starbucks board chair who will become lead independent director once Niccol joins. “Like all of us at Starbucks, he understands that a remarkable customer experience is rooted in an exceptional partner experience,” said Hobson. “Our board believes he will be a transformative leader for our company, our people, and everyone we serve around the world.”
Starbucks stock surged about 25% on the August 13 news, basically accounting for all of Starbucks’ August gains.
Work cut out for him
The job of turning around Starbucks will take some time, as it is coming off a weak fiscal third quarter, where revenue fell 1% year over year to $9.1 billion, missing estimates, with comparable store sales down 3%. Earnings per share of 93 cents were down 6% from the same quarter a year ago, in line with estimates.
For the full fiscal year, Starbucks expects a low single digit decline to flat comparable store revenue growth with 6% new store growth. Overall, revenue growth is anticipated to be in the low single digits, with EPS growth is anticipated to be flat to low single digits.
Earlier this year, Starbucks rolled out a three-part plan to improve operations, become more efficient, and attract new customers. It is expected that Niccol will put his stamp on these plans, but until he officially takes over, we can only speculate on how he will drive these initiatives forward.
Is Starbucks stock a buy?
Investors could put faith in Niccol’s ability to turn around a company with one of the best brands in the industry, but it would probably be wise to wait until he rolls out more specifics.
Starbucks stock is roughly flat year to date and analysts have a median price target of $100 per share, which would be a 7% gain.
I wouldn’t put much stock in that price target as it will change once Niccol takes over.
I don’t think Starbucks stock is cheap enough to warrant a buy on faith, with a P/E of 26, but keep an eye out once the new CEO is aboard as it has solid upside growth potential.