Starbucks’ stock rallies on speculation of a turnaround under its new CEO – the head of Chipotle Mexican Grill

By Steve Gelsi

Brian Niccol will lead the 39,000-store coffee-shop giant after six years at Chipotle

Starbucks Corp.’s stock notched its biggest percentage gain ever on Tuesday, as Wall Street placed bets that incoming chief executive Brian Niccol will stage a turnaround at the coffee chain after his prior success at Chipotle Mexican Grill Inc. and Taco Bell.

Starbucks (SBUX) said Niccol, 50, is departing his current job as chief executive of Chipotle (CMG) and joining the coffee chain on Sept. 9, amid pressure on Starbucks from shareholder activists Elliott Investment Management and Starboard Value.

Elliott said it has been engaged with Starbucks over the past two months and views the naming of Niccol “as a transformational step forward for the company,” according to a statement.

Art Hogan, chief market strategist for B. Riley Wealth, told MarketWatch that Niccol “is clearly seen as someone that can come into a struggling situation and turn things around.”

The gain by Starbucks marks its largest one-day rise on record, according to Dow Jones Market Data. The company’s bonds were also in demand and spreads had tightened by as much as 10 basis points on one series, as the following chart from data-solutions provider BondCliQ Media Services shows.

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Meanwhile, Chipotle Mexican Grill’s stock finished 7.5% lower, its biggest percentage drop since July 27, 2023.

Starbucks was also the top gainer among the components of the S&P 500 SPX on Tuesday, while Chipotle was the worst performer.

Prior to Tuesday’s moves, Niccol has presided over a 30% gain in Chipotle’s stock price in the past year.

Since he started in the job at Chipotle in 2018, he helped the restaurant chain move past E. coli and salmonella outbreaks that had clouded the future of the chain.

Niccol was also known as the force behind the Doritos Locos Tacos in 2012 that helped stoke interest at Taco Bell (YUM), where he worked as chief executive from 2011 to 2018.

Hogan said Starbucks still faces challenges, such as its large exposure to China, where it placed a big bet on growth that hasn’t been realized.

Nancy Tengler, chief executive of Laffer Tengler Investments, which owns shares of Chipotle and Starbucks, said the coffee chain’s stock has been a “colossal disappointment” but that Niccol has “worked magic” at Chipotle, which is a top pick by the firm.

“Niccol will fix Starbucks – I think that’s the very good news,” Tengler said in an emailed statement.

Outgoing Starbucks Chief Executive Laxman Narasimhan “didn’t understand retailing, any restaurant retailing, and he did not understand the Starbucks culture,” Tengler said.

TD Cowen analyst Andrew Charles upgraded Starbucks to buy from hold and boosted his price target for the stock to $105 from $81.

“We expect Mr. Niccol to help Starbucks better identify its brand identity and better utilize marketing to create brand buzz,” Charles said. “Importantly, as evidenced when Mr. Niccol went to Chipotle from Taco Bell, he appreciates what makes a premium brand special, while raising awareness of these features to the masses.”

BMO Capital Markets analyst Andrew Strelzik reiterated an outperform rating on Starbucks and said Niccol is a “proven leader that has demonstrated the ability to drive performance in key areas” such as driving traffic, making operational improvements, using digital communications as a growth lever, enhancing company culture and creating better-than-expected earnings per share.

Meanwhile, Chipotle Mexican Grill named Scott Boatwright, its chief operating officer, as interim CEO.

Starbucks said Rachel Ruggeri, its financial chief, will serve as interim chief executive until Niccol starts next month.

Narasimhan has stepped down as chief executive of Starbucks. He had been picked for the role in 2022, coming from consumer-products multinational Reckitt-Benckiser (RBGLY) and taking over in March 2023.

Howard Schultz, the longtime Starbucks chief executive and now the company’s chairman emeritus, said Niccol “is the leader Starbucks needs” at a pivotal moment in the history of the 39,000-store coffee retailer.

“His retail excellence and track record in delivering extraordinary shareholder value recognizes the critical human element it takes to lead a culture and values-driven enterprise,” Schultz said.

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Niccol also serves on the board of directors of Walmart Inc. (WMT).

Schultz took his latest turn as Starbucks CEO, on an interim basis, in 2022, after the retirement of Kevin Johnson, who had served as chief executive since 2017, when he took over from Schultz.

Elliott had been in talks with Starbucks about its slowing sales and operational challenges. Last month, Starboard Value emerged as another activist investor to take a stake in Starbucks, which has seen its share price fall by 19.8% this year, compared with a 12.1% rise by the S&P 500 SPX. Chipotle Mexican Grill’s stock is up 22.2% this year.

From the time Narasimhan became chief executive of Starbucks on Oct. 1, 2022, through Monday’s close, the company’s stock dropped 8.6%, while the S&P 500 rallied 49.1%. During that same period, Chipotle’s stock gained 85.9%

In a statement, Niccol said said he sees “tremendous potential to drive growth and further enhance the Starbucks experience.”

In a 2021 article for Harvard Business Review, Niccol said he focused on executing Chipotle’s “food safety seven” checklist and boosting employee training.

He said he worked to promote the company’s marketing message around the theme of “for real,” with a promise of “food integrity.”

Under Niccol, Chipotle also overhauled its computer system, added a second kitchen in restaurants to handline online orders and created a rewards system that drew in tens of millions of customers.

“When I arrived at the company, some people were asking whether we should be expanding into breakfast, or switching to frozen food to enhance safety, or offering combo meals the way the burger chains do,” Niccol said. “We knew not to do any of those things. We just needed to get even better at doing what people already loved us for.”

Venessa Wong, Tomi Kilgore and Steve Goldstein contributed.

-Steve Gelsi

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08-13-24 1656ET

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