After Starbucks made a surprise leadership change this week, Wall Street is focused on what’s next for its troubled China business as the company’s stock struggles. Starbucks announced earlier this week that Chipotle CEO Brian Niccol will succeed Laxman Narasimhan at the helm of the coffee chain. Since then, investors have sent the stock soaring, and Wall Street has given the company multiple analyst rating upgrades. Nicole has been praised for her work at Chipotle, especially his focus on digital and online ordering models. But analysts covering the company are looking back at his career at Yum Brands and Taco Bell to see how Nicol will handle Starbucks’ troubled China operations. Starbucks is one of several brands struggling to win over Chinese consumers. The Seattle-based company said same-store sales in the region fell 14% in the quarter ended June 30. Store revenue fell 11% this quarter. Against this backdrop, investors have been wondering whether the company will divest its China operations or if there are other ways to correct the pattern. Outgoing CEO Narasimhan said on the company’s recent conference call that it was exploring “strategic partnerships” for its China operations, which could include joint ventures or technology agreements. With the installation of Nico, it was widely expected that at least some course corrections would be made. Market participants are also hoping for better performance from the stock, which has fallen about 22% since Narasimhan took over in March 2023 and since Monday’s close. In comparison, Chipotle’s stock price rose about 74% during the same period. “No one knows where Starbucks will go in China,” said Jeff Farmer, an analyst at Gordon Haskett. “But we are long overdue for a new understanding of China’s competitive environment, consumption landscape and capital-intensive development strategy. perspective. ” SBUX CMG 5Y mountain Starbucks vs. Chipotle, Five years of weakness in China has weighed on the stock for some time, which is why TD Cowen analyst Andrew Charles downgraded Starbucks stock in September 2023. Charles, one of the analysts who upgraded Starbucks to buy following Nicol’s arrival, expects the China business to face “long-term headwinds” due to competition, macro and potential geopolitical issues. Charles said in a research note before Nicholl’s arrival that refranchising would have only a modest impact on Starbucks’ earnings, while a spinoff would be slightly accretive to earnings per share. “We believe refranchising in China is a more important acknowledgment that capital will be deployed in a smarter manner, which is the first step in improving the direction of the company,” Charles wrote in an Aug. 7 note. “Management stepped up efforts to repair the U.S. business. While Nicole was with Yum Brands, the parent company of KFC and Pizza Hut, the group spun off its China operations into what is now Yum China. Although the axed business is headquartered in Shanghai, it can be listed on the New York Stock Exchange under the ticker YUMC. John Ivanko of J.P. Morgan said Nicholl should take similar action. “We continue to believe that SBUX should divest its China operations as Brian’s previous employer, Yum Brands, has done,” Ivanko told clients, adding that the deal was revenue neutral and Contributes to free cash flow. Ivanko noted that performance in recent years shows that despite Starbucks’ efforts to expand, its workforce in the region has achieved little. In fiscal year 2018, the operating revenue of the entire international market was approximately US$1.15 billion, with more than 5,600 company-operated stores and 6,200 franchise stores. Although the company’s store count has surged to more than 9,800 and the number of authorized stores exceeds 12,000, International’s operating income is expected to be only $1.05 billion by the end of 2024. It hasn’t all been smooth sailing for Yum China shares, however, with U.S. stocks recently lagging shares of flagship Yum Brands amid challenges for consumer-facing brands in the Asian country. Yum China’s stock price fell more than 19% in 2024, building on last year’s drop of more than 22%. Meanwhile, Yum Brands shares are up more than 5% this year, extending gains after rising 2% in 2023. Ivankoe isn’t the only Wall Street firm to make this point a big change. Citigroup’s Jon Tal said some form of spin-off, joint venture or ownership change may be best for investors in the long run. He pointed out that in this case, local players will be able to monitor the brand on the ground. Evercore ISI analyst David Palmer said the spin-off and licensing plans were not surprising given the need to focus on turning around the U.S. business. In the United States, Starbucks has been struggling to attract customers to its stores, relying on promotions. Deutsche Bank analyst Lauren Silberman said investors were pleased with Narasimhan’s comments about the potential for strategic partnerships in China, further demonstrating why this is a good course of action. She also pointed out that company-owned models are only common in the United States and China, while authorized partners already operate in most other markets. When it comes to Nicole herself, she emphasizes that much of his experience has been in U.S. operations, another reason why the spin makes sense. ‘Corporate ownership advocates’ outside the U.S. To be sure, not everyone thinks spinoffs are the way to go. BTIG’s Peter Saleh said Niccol’s appointment should signal to investors that there would be no major changes to the development of the China business, including a sale or spin-off. “We believe Brian has earned the respect and confidence of investors (and founder Howard Schultz) and will be afforded the leeway to invest domestically and/or remain in China,” Saleh said. Morgan Stanley Analyst Brian Harbour said a mix of self-operated and authorized stores is more likely for the China business than a full-scale franchise approach. Above all, Nicol’s track record at Chipotle shows that he is a “fan of ownership of the company” in some cases internationally, Haber said. Alternatively, investors could join the camp of Stifel’s Chris O’Cull, who doesn’t think it matters for the stock. Still, he said traders want to know where the company is headed within a reasonable time frame and more information on how Starbucks will respond to challenges and grow market share. “Clarity on China’s strategic direction would be helpful, but we believe it remains a secondary issue,” he said. “Absent a material deterioration, we believe the stock can perform even if the China business continues to struggle.” Still, even Okar has his own thoughts on what he thinks Nicol will do: “If Nicol We would not be surprised that Mr. Er would like to keep the company as a corporate-owned business,” he said. “This would give him the control and flexibility he needs to resolve any issues.
Brian Niccol’s fix for Starbucks China cafe could set tone for stock price | Real Time Headlines
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