Brewing Confidence: Evaluating Starbucks' New Leadership and Market Potential

Rick Snowdon, CFA

So, we bought Starbucks back in May, which I think was about two, three months before the announcement that the CEO was being replaced. The CEO, by the way, had been there less than one year. Our thesis was and remains that Starbucks is a tremendous brand with some near-term fundamental weaknesses in traffic growth and margins. They're being caused by some very addressable operational challenges. And they are challenges that largely come from how popular the brand is. There's just so much traffic trying to get through the stores — that has made things difficult as complexity has increased.

So, the CEO at the time was talking about the right things, and we had an open mind about his ability to address effectively these things. However, his replacement with Brian Nichol was really the best news we could hope for. Nichol's experience is extremely applicable. He turned around Chipotle; he was at Taco Bell before that. The experience that Chipotle was addressing — complexity of the stores, relieving bottlenecks while preserving and enhancing the brand — which is exactly what needs to happen here.

So, does it increase our estimate of intrinsic value? I'd say right now, not officially. However, it certainly increases the confidence we have in the estimate, and over time, I think it very well could increase our estimate of intrinsic value.