Starbucks CEO Brian Niccol's Recent Strategies Consistently Employ a Crucial Feature, Which Could Propel the Dividend Share to Renewed Expansion
When it became known that previous Chipotle CEO, Brian Niccol, would become the new leader of Starbucks (SBUX seeing a -0.60% drop), the coffee giant's stock soared an impressive 24.5% during a single trading session.
However, in the recent months, Starbucks' stock has barely budged as investors ponder the implications of Niccol's leadership transition for the company, which, despite the surge, remains at approximately the same price as it was four years prior.
The company's fourth-quarter financial results for the 2024 fiscal year were discouraging, but Niccol's remarks in shareholder letters and during the earnings call hinted at a host of potential strategies that could signal better times for the coffee colossus.
Let's examine where Starbucks might be heading and if the dividend stock is a sound investment at the moment.
A return to its origins
Starbucks established its global prominence by offering high-quality, handcrafted espresso drinks and enhancing everyday options beyond basic, weaker coffee. Starbucks' success hinged on providing customers with a "third place," or a location separate from home and work where they could unwind. To make the third place appealing, Starbucks promoted offering high-speed internet, a diverse coffee and tea selection, and a culture centered around knowledgeable baristas.
In recent times, Starbucks has deviated somewhat from these foundational values, committing more attention to speed instead. It evolved into a more transactional entity with mobile ordering, the escalation of Starbucks Rewards, and the Starbucks app, allowing customers to bypass queues. While this innovation remains beneficial for the business, it has produced drawbacks, such as the erosion of Starbucks' culture, particularly among dissatisfied baristas under pressure to manage high volumes of transactions. Over time, Starbucks transformed more into a factory than a tranquil refuge away from home and work. With high-speed internet now readily available in homes and Starbucks prioritizing transactions, there was less incentive to linger at Starbucks.
No company can revert to its past entirely. Yet, Starbucks can implement adjustments to preserve the strengths of mobile ordering while improving the employee and customer experience. Many of Niccol's new strategies appear to reflect this vision.
A new course
Below are some of the most significant strategic modifications Starbucks discussed on the earnings call:
- Improving staffing to reduce employee turnover.
- Ensuring adequate staffing during peak hours.
- Modifying Mobile Order and Pay to avoid overwhelming employees during peak hours.
- Bringing back condiment coffee bars at all cafes by early 2025, allowing customers to customize their drinks and reducing their reliance on baristas.
- Simplifying the menu.
- Investing in equipment and procedures to enhance the in-store experience.
- Scrapping the surcharge for non-dairy milk options in North American company-owned and operated stores.
- Halting price increases in North American company-owned and operated stores through at least fiscal 2025.
In addition to these changes, Niccol is borrowing from Starbucks founder Howard Schultz's playbook by emphasizing the importance of a third place in the contemporary world. Niccol said the following during the earnings call:
We're reclaiming the third place, making our cafes feel inviting and like the comfortable coffeehouse our customers remember. In the coming months, we aim to introduce more personal touches to boost the cafe experience. For example, we'll begin to prioritize serving coffee in ceramic mugs for customers who choose to consume their coffee in our cafes. We're also examining our cafe designs to restore more comfortable seating and amenities and to ensure our shops are a location where customers want to relax, work, and eat.
Starbucks' top-tier leadership is not shying away from the company's challenges and the efforts required to restore it to a more sustainable growth trajectory. However, that does not mean the stock is an irresistible buy right now.
A subpar fiscal year
The following chart illustrates Starbucks' less-than-stellar performance in recent times.
Sales growth has been robust, but profits have declined, and earnings remain at pre-pandemic levels. The 2024 fiscal year saw a 2% sales drop, a 4% decline in comparable transactions, and a 6% decrease in non-GAAP earnings per share.
The results indicate that Starbucks' price increases have not been sufficient to stimulate significant earnings growth. Niccol's recognition that the company needs to focus less on price increases and even reduce prices (such as by eliminating the non-dairy surcharge) signifies that the company is returning to a customer-focused approach, even if this means compromising short-term results.
Patient investors might want to scrutinize Starbucks more closely
Transformations are never straightforward, particularly when dealing with a large company like Starbucks that boasts a powerful brand. The substantial surge in the stock price in August on the news that Niccol would take over as CEO likely factored in that Starbucks' most challenging days were behind it. In reality, the company still needs to establish that its strategic changes can materialize into substantial earnings growth.
Still, Starbucks seems to be an attractive investment option at present. The valuation isn't exorbitant, with a 29.3 price-to-earnings (P/E) ratio, given the earnings used to calculate that P/E are less than impressive. Moreover, Starbucks offers a healthy dividend yield of 2.5% and recently increased its dividend for the 14th consecutive year.
For the past few years, investing in Starbucks was predominantly seen as a source of income and value preservation. However, recently, it's gained an exciting edge due to its potential for future growth. Those with a positive outlook on the transformations might wish to purchase the shares immediately, while more cautious investors could benefit from waiting a short while to evaluate the success of the leadership's new tactics.
Given Starbucks' recent focus on improving its employee and customer experience, some investors might consider allocating their money towards this dividend stock as an investment opportunity. The company's strategies, such as reducing employee turnover, improving staffing, and simplifying the menu, could potentially lead to higher profits in the future. Furthermore, Starbucks' commitment to restoring the third place feeling in its cafes, as hinted by CEO Niccol, could attract more customers, leading to increased revenue.
