Prediction: The New Starbucks CEO's Turnaround Plan Will Boost the Stock
After officially taking the helm at Starbucks (NASDAQ: SBUX) earlier this month, new CEO Brian Niccol laid out his plans to help turn around the struggling coffee shop operator in an open letter to customers, employees, and shareholders.
Nothing Niccol laid out was particularly groundbreaking, but it is the plan's simplicity that I predict will help Starbucks get back on track and help boost its stock over the long run.
Back to its roots
In his open letter, Niccol said that under his leadership, Starbucks would focus on four main areas. His initial plan is to first concentrate on its U.S. business and help turn that around.
The first area that Niccol said Starbucks will focus on is empowering its baristas to take care of its customers. He said this includes giving them the right tools to consistently make great drinks, while delivering them personally.
Next, he said the company must get the morning right by delivering high-quality food and drinks in a timely manner, every time. Third, he wants Starbucks to go back to being a community coffee house by elevating the customer experience. And finally, he wants Starbucks to go back to telling its story.
Ultimately, these four things are all aimed at improving both the employee and customer experience. While Starbucks obviously sells coffee and food, it has also long sold an experience. However, the experience part of its business has been lacking in the past few years under its prior leadership.
This appears to stem from understaffed stores and overworked and unhappy baristas. Understaffed stores take out the personalized side of the experience, as workers rush to just fill orders as quickly as possible with little customer interaction. It also generally makes workers unhappy, which negatively affects the customer experience as well.
This also created long wait times, which caused customer frustration. In past quarters, Starbucks has noted that it saw customers cancel online orders placed in the morning due to wait times.
In his letter, Niccol said the company will be making investments in technology and its supply chain to help enhance the employee and customer experience, and improve its app and mobile ordering system. He'll also spend time in stores and customer support centers during his first hundred days.
While not directly stated, it wouldn't be surprising if the company will need to also invest in more baristas, as technology alone likely will not completely solve its issues. And if Niccol wants Starbucks to return to the coffee house experience, it needs properly staffed stores. Equipment to help speed up the drink-making process, and better staffing management solutions, can also help, but the company still needs enough workers to give that personalized experience.
After tackling its issues in the U.S. first, Niccol said he then will look toward improving international markets. China, Starbucks' second-largest market, is a priority. He said the company needs to capitalize on its strengths in the market and begin to understand the path to capture growth in the country.
Image source: Getty Images.
Is it time to buy the stock?
Niccol hit on most of the big points of what I think is needed to help fix Starbucks, outside of investing in more baristas. Given that, along with his track record as CEO at Chipotle Mexican Grill, I believe his plan to fix the U.S. business will work and that the stock will benefit nicely from it in the years ahead. Bringing back the Starbucks experience, and fixing its mobile ordering issues, were the top two things needed to help revive the company's struggling U.S. business.
China could be trickier given the competitive dynamics in the country, but Niccol needs to fix the U.S. business first. It also wouldn't be surprising to see him spin off the China business, much the way Yum! Brands did with Yum China.
SBUX PE Ratio (Forward 1y) data by YCharts.
While Starbucks' stock has bounced higher following the hiring of Niccol, at a forward price-to-earnings (P/E) ratio of 24 based on next year's analyst estimates, the stock is still trading below where it has often traded over the past few years. With Starbucks now having a solid plan, I would be a buyer at current levels before signs of a turnaround take hold and take this restaurant stock even higher.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
