Starbucks CEO’s ‘achievable’ vision sparks cautious optimism on Wall Street

(Bloomberg) — New Starbucks Corp. boss Brian Niccol’s turnaround pitch touched on everything from markers to soy milk, and Wall Street was pretty happy with what it saw.

Nichol spoke on Wednesday during his first earnings call since taking over as CEO, vowing to whip up drinks for in-store customers in four minutes or less and launch a more organized mobile ordering system.

He’s also slowed the pace of new store openings and remodels as Starbucks explores how to make their designs more functional for employees and welcoming to guests. The company will refocus on coffee while being more rigorous about new products.

Additionally, Niccol wanted to control customization because unlimited beverage options increased barista workflow and caused delays. In an interview Wednesday, he likened all the options to “when you see a kid go to the water fountain and pour all the water cooler drinks into their cup.”

The plan is “very clear and ambitious,” Morgan Stanley analyst Brian Harbor said in a note to clients after the call. “It’s easy to be cynical about this now, but it sounds a lot like the first Starbucks we went to decades ago.”

The vision, he added, “seems truly achievable, not abstract.”

Longtime Starbucks leader Howard Schultz wrote in a LinkedIn post on Thursday that Nicole understands the brand, adding that many employees are “inspired” by the new CEO’s plans.

“I listened to Starbucks’ earnings call yesterday and was impressed by Brian’s grasp and understanding of all aspects of Starbucks and the issues facing the company,” wrote Schultz, who remains the company’s largest shareholder one.

Shares of Starbucks rose 0.4% in New York trading on Thursday. The stock has gained 1.8% so far this year, well below the S&P 500’s 20% gain over the same period.

SEE ALSO: Starbucks barista denounces ‘skeleton’ employees in new CEO test

Nicholl is undoing the moves of his predecessor, Laxman Narasimhan, who focused on ramping up product launches while offering discounts and accelerating store remodeling, among other initiatives.

Bloomberg Intelligence analysts Michael Halen and Amir Islam wrote earlier this year that Narasimhan’s “volume” of moves would make it harder for Starbucks to implement them, while The deals weaken the brand’s premium positioning. Nicoll said that in addition to testing new products more rigorously, he would scale back promotions and freeze prices this year.

“We are encouraged by the framework Brian provided as it provides additional color on key areas of long-term focus while also providing concrete examples of the short-term actions companies are taking,” Portfolio Abby Roach, Allspring Global Investments analyst, via e-mail Email said.

Some recent changes include bringing back ceramic mugs, using markers to personalize customers’ mugs and eliminating the surcharge for non-dairy products. Starbucks is also bringing back the condiment bar, once again allowing customers to add sugar and cream to their liking — a move that Harper called “a win for cinnamon lovers across the country.”

“In my mind, those ‘let’s go’ things, we’re going to do them,” Nicol said in the interview. Other efforts, such as streamlining the online pickup order process or paring back menus, “we’re going to have to test and learn our ways,” he said.

Analysts expect the changes will take some time to sustain, and the process won’t be easy. Morgan Stanley lowered Starbucks’ profit forecast for the fiscal year starting in late September.

Other analysts also cut their forecasts, citing the view that the company’s drinks are now too expensive and that investments to repair the ship could eat into profits, which has impacted sales. Nicol has no plans yet for Starbucks’ troubled China operations, admitting he needs to spend more time there “to better understand our operations and the market.”

“We don’t think this will have much of an impact on the stock price in the near term — there’s still a lot of work to be done,” Harber wrote of the turnaround plan.

Jefferies analyst Andy Barish also questioned whether limited customization options could alienate some customers and increase competition from growing chains such as Dutch Bros.

“While we like many of the changes, we wonder whether a return to the basics of an old-school coffeehouse setup (clearly favored by baristas) will be a priority in 2024 and beyond,” Barish wrote in a note to clients. Better conform to customer habits.”

(Add Nicol’s quote in fourth paragraph, Schultz’s reaction in eighth paragraph, and stock trade in ninth paragraph.)

More stories like this can be found at Bloomberg.com