Starbucks stock had been languishing until it was announced that Howard Schultz would return as CEO in April 2022 with Kevin Johnson retiring, which is a bullish sign for SBUX as I’ll explain in today’s video.
SBUX recently hit a low of $79 per share until March 16 when it jumped on the news of the legendary Howard Schultz returning to lead Starbucks as interim CEO as the current CEO, Kevin Johnson, is retiring after 5 years at the helm.
Schultz made Starbucks into the leading global coffee brand, and I think his return for however long is a very bullish sign for both the company and its stock. Starbucks said they plan to have a permanent CEO by fall 2022.
I discuss Starbucks’s financial performance over the last 5 years during Kevin Johnson’s tenure as CEO, and how his management track record compares to Howard Schultz’s performance as CEO.
From what I’ve learned along my investing journey, companies tend to do well when they are led by their founders. Some examples are Reed Hastings of Netflix and Steve Jobs of Apple. And while Howard Schultz didn’t found the original Starbucks, be basically founded the version of Starbucks we’ve all come to know and love today.
And say what you will about my fellow millennials spending $2,000 a year on coffee, but Schultz did a great job with Starbucks. And while I prefer to pay only 11.5 cents for my cup of coffee, I have a lot of respect for Schultz’s leadership skills and for Starbucks as a business.
Schultz ran Starbucks as its CEO from 1986-2000 and again from 2008-2017. From the time of the SBUX IPO in 1992 until 2018 when Schultz stepped down as chairman of the board, the stock price had grown by 21,000% or was a 210 bagger in only 26 years!
To put it in perspective of how difficult it is to repeat a similar performance, we can evaluate how Starbucks has performed since April 2017 when Kevin Johnson became CEO. Back then, the stock was trading at $58 per share and then it just about doubled, reaching a peak of $126 per share in July 2021.
But then with a number of challenges including slowing sales in its biggest markets in the US and in China, the stock began a gradual decline in price. So before Johnson’s retirement was announced, the harsh reality is that the stock only grew by 36% in 5 years, which is a compounded annual return rate of 7% per year. This would be OK if we were expecting normal historical stock averages, but in comparison the S&P 500 returned a 15% CAGR over the last 5 years.
And other challenges include labor shortages and reduced operating hours as restaurants and food establishments have been trying to resume normal operations after 2 years of shutdowns and operational disruptions. So it is understandable that sales may not be as strong yet.
I’m sure the types of challenges that Starbucks has been facing are similar to what other publicly traded food and beverage companies are facing. But yet, other companies such as Chipotle were able to thrive to the extent that its stock performance has quintupled since Brian Niccol became CEO in March 2018. So it would be good to study why Chipotle was able to be successful as a 5 bagger whereas Starbucks floundered over the last five years.
This is not to take away from the great strides that Starbucks has been making. In a similar way to how Chipotle is increasingly integrating technology with mobile app ordering, Starbucks has been doing a lot of the same.
The Starbucks app has been doing well for drive through and mobile ordering, and people really like the Starbucks Rewards program where they can redeem a number of stars for various food and beverage items. I’m sure Starbucks will be increasingly relying on technology to help them reach the next level.
Starbucks has also been challenged by how over 140 stores in 26 states have been petitioning to unionize, which was spearheaded by stores in Buffalo, New York. Maybe after years of experiencing below average pay, workers would like to have wages be at least $15-17 per hour and this is likely fueling the unionization push.
Starbucks explained in their annual letter to shareholders in January 2022 that they are investing $1 billion through summer 2022 to increase wages and training for its hourly staff. Starbucks’s management is trying to average up hourly pay to that $17 per hour wage level. I think this is a good step in the right direction and hopefully Schultz will do the right thing for Starbucks partners.
It’s awesome that Starbucks is striving to live up to its values and mission by encouraging diversity and inclusion in the workforce by hiring more diverse people. They also tied their expectations for diversity outcomes to executive compensation.
While what Starbucks said in their letter was good, it seemed to lack candor directly from the CEO because the letter was signed by two people: chair of the board Mellody Hobson and CEO Kevin Johnson.
What I’ve learned from the book “Investing Between The Lines” by Laura Rittenhouse is you want to decipher how much candor is coming from the CEO as part of a qualitative assessment of how well they are running the company.
So it’s a little questionable as to who this letter is really coming from, but now that we know Kevin Johnson is leaving we don’t have to wonder if we’ll see candor from him again. There are also quantitative factors to assess how a CEO is performing in growing a company which I review as well.
Based on how I like to pick stocks using Warren Buffett’s and Charlie Munger’s principles, we should be on the look out for factors like insider sales, various growth rates like in revenues, earnings, and free cash flows, and return on invested capital (ROIC).
Similar to the idea of ROI, ROIC measures profitability where a company attempts to generate returns on invested capital using a combination of equity and debt.
Throughout most of Schultz’s tenure, or going with 2007-2016, ROIC averaged 23.37% (removing the anomalous 0.1% in 2013), which is pretty good. With Johnson’s ROIC average for 2017-2021, it averaged 17.6%, which is almost 6% less than the ROIC levels during Schultz’s leadership.
Of course ROIC cratered in 2020 and recovered better in 2021, but there are also general financial trends that show that Starbucks has been struggling over the last several years. We can see that while figures like net cash, net earnings, and total assets are improving, their total liabilities (debt) are also increasing significantly.
Higher debt levels are not a good sign because it shows that Starbucks hasn’t been able to deliver higher returns with higher leverage (or at least not yet). Maybe this is why the stock price has been suffering after it had been trading at a 30 PE in December 2021, and now it’s trading at 23 PE.
More importantly than whatever the stock price is doing in the short term, with high inflation of 7.9% CPI causing the price of coffee to go up and workers demanding higher pay that they deserve, I’m hoping with Howard Schultz returning to the CEO post that he can provide a renewed sense of purpose and inspire the workforce.
I’m sure Starbucks will continue striving to make progress in its sustainability initiatives with climate issues posing risks to the sustainability of coffee farming. And they’re also trying to partially phase out single use cups, which will hopefully help out the environment and make coffee more affordable.
Inflation could also be leading to a wage price spiral as workers demand higher wages, and then when companies pay them more, those costs get passed onto customers in paying for higher priced goods and services.
Schultz has got his work cut out for him until and unless he passes off the CEO position to someone else. I’m secretly hoping he stays on for a long time, though he might not want to work into his 90s like my favorite role models (Buffett and Munger).
For however long he stays on, I’m sure Schultz will do a good job and encourage people to see Starbucks as the third place again as more people are returning to office.
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