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News Junction > Blog > World News > Brian Niccol’s fix for Starbucks China cafes could set tone for shares
Brian Niccol’s fix for Starbucks China cafes could set tone for shares
World News

Brian Niccol’s fix for Starbucks China cafes could set tone for shares

Published August 18, 2024
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After the surprise leadership change at Starbucks this week, Wall Street has focused on what’s next for its struggling China business amid a rough patch for the stock. Starbucks announced earlier this week that Chipotle CEO Brian Niccol would helm the coffee chain, replacing Laxman Narasimhan. Afterward, investors sent the shares soaring and the Street rewarded the company with several analyst upgrades. Niccol has been lauded for his work at Chipotle, particularly in regards to his focus on digitization and online ordering models. But analysts who cover the company are looking farther back in his career for his time in leadership at Yum Brands and Taco Bell for insights into how Niccol will handle Starbucks’ floundering China business. Starbucks has been one of several brands fighting to win Chinese consumers. The Seattle-based company said same-store sales in the region tumbled by 14% in the quarter ended June 30. By comparison, sales slipped by just 2% in the U.S. As a result, revenue at the more than 7,000 Starbucks locations in China slid 11% in the quarter. Given this backdrop, investors have been left wondering if the company will spin off the China business, or if there are other ways to rectify the model. Outgoing CEO Narasimhan said on the company’s most recent conference call that “strategic partnerships” were being explored for the China segment, which could include a joint venture or tech agreement. With the installation of Niccol, there’s broad agreement that, at the minimum, some course correction will be done. Market participants are also hoping for better share performance, with Starbucks stock falling about 22% from when Narasimhan took over in March 2023 and Monday’s closing bell. By comparison, Chipotle climbed around 74% during the same period. “No one knows what direction Starbucks will go with China,” said Gordon Haskett analyst Jeff Farmer. “But a fresh perspective on the country’s competitive environment, consumer landscape and capital-intensive development strategy is long overdue.” SBUX CMG 5Y mountain Starbucks vs. Chipotle, 5 years China’s weakness has weighed on the stock for some time, and was the reason TD Cowen analyst Andrew Charles downgraded Starbucks shares in September 2023. To spin or not to spin? Charles, who was among the analysts who upgraded Starbucks to buy after Niccol’s arrival, expects that the China operations will face “prolonged headwinds” due to competition, macro and potentially geopolitical issues. In a research note ahead of Niccol’s arrival, Charles said refranchising would only slightly weigh on Starbucks’ earnings, while a spinoff would be slightly accretive to earnings per share. “In our view, a China refranchising is a more important acknowledgement that capital will be deployed in a more judicious manner, a first step towards improving the company’s direction,” Charles wrote in a note dated Aug. 7. The analyst has been hoping for management to intensify its focus on fixing the U.S. business. While Niccol was at KFC and Pizza Hut parent Yum Brands , the conglomerate separated its China business into what is now known as Yum China . Though the chopped-off business is based in Shanghai, it can be traded on the New York Stock Exchange under the ticker YUMC. JPMorgan’s John Ivankoe said Niccol should take a similar course of action. “We continue to think it’s advisable for SBUX to pursue a spin of their China business, much like Brian’s previous employer YUM did,” Ivankoe told clients. He added that the deal can be neutral to operating income and help free cash flow. Ivankoe pointed to performance in recent history to show how little fruit Starbucks has gotten for its labor in the region in spite of expansion efforts. In the 2018 fiscal year, the entire international market had an operating income of about $1.15 billion with more than 5,600 company-owned stores and 6,200 licensed locations. International is slated to end 2024 with just $1.05 billion in operating income, despite swelling to more than 9,800 company stores and 12,000 licensed ones. Yet it hasn’t necessarily been smooth sailing for Yum China’s stock, with U.S. shares recently lagging the flagship Yum Brands stock amid challenges for consumer-facing brands in the Asian country. Yum China has tumbled more than 19% in 2024, building on last year’s slide of more than 22%. Yum Brands, meanwhile, has added more than 5% this year, extending gains after advancing 2% in 2023. YUMC YUM 5Y mountain Yum China vs. Yum Brands, 5 years Ivankoe isn’t the only one on Wall Street making the case for a big change. Citi’s Jon Tower said some sort of spin, joint venture or change in ownership may be best for investors over the long run. He pointed to the fact that, in this scenario, local operators would be able to oversee the brand on the ground. Evercore ISI analyst David Palmer said a spinoff and licensing plan wouldn’t be surprising given the need to focus on turning around the U.S. business. Within the U.S., Starbucks has struggled to bring customers to stores and leaned on promotions. Investors were pleased with Narasimhan’s comments about the potential for a strategic partnership in China, further offering evidence of why it’s a good course of action, according to Deutsche Bank analyst Lauren Silberman. She also noted that the company-owned model is only common in the U.S. and China, while licensed partners already operate businesses across most other markets. And when it comes to Niccol himself, she highlighted that most of his experience has been centered on U.S. operations as another reason that a spin makes sense. A ‘fan of company ownership’ outside U.S. To be sure, not everyone sees a separation as the likely path. BTIG’s Peter Saleh said Niccol’s appointment should suggest to investors that there will be no major changes to the development of the China segment, including a sale or spin. “We believe Brian has earned investor respect and confidence (as well as founder Howard Schultz), and will be given the leeway to make investments domestically and or stay the course in China,” Saleh said. Morgan Stanley analyst Brian Harbour said a hybrid approach with both owned and licensed stores is more likely for the China business than a full push to franchising. On top of that, Niccol’s Chipotle track record, Harbour said, shows that he’s a “fan of company ownership” in some instances internationally. Alternatively, investors can join the camp of Stifel’s Chris O’Cull, who doesn’t think it matters much for the stock either way. However, he said traders would appreciate clarity around what direction it will go within a reasonable time frame and more information on how Starbucks will address challenges and grow market share. “Clarity on the strategic direction in China will help, but it will remain a secondary issue, in our opinion,” he said. “Absent a significant incremental deterioration, we believe the stock can work even if the China business continues to struggle.” Still, even O’Cull had a take on what he thinks Niccol will do: “We would not be surprised if Mr. Niccol preferred to keep the business as a company-owned operation,” he said, “which would give him the control and flexibility needed to address any issues.”

#Brian #Niccols #fix #Starbucks #China #cafes #set #tone #shares

TAGGED:Breaking News: BusinessBrianBrian Niccolbusiness newsCafésChinaChipotle Mexican Grill IncfixInvestment strategyNiccolsrestaurantsRetail industrysetsharesStarbucksStarbucks CorpStock marketstoneYum China Holdings IncYum! Brands Inc
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