A Tale of Two Franchises and One CEO
Starbucks (SBUX) is soaring today… Shares of the coffee giant alone are up over 21%, a record one-day jump for the stock.
Meanwhile, shares of Chipotle (CMG) are down about 8%.
Now you’re probably saying “That’s cool Nate, why are you telling me this?”
And that’s because these two stocks have one really interesting thing linking them.
Starbucks just poached Chipotle’s CEO. Brian Niccol will be leaving CMG and heading over to SBUX on September 9th with SBUX’s former CEO stepping down immediately.
Now, Niccol is a great CEO who has been able to grow Chipotle tremendously since 2018 (truly, one of the top stocks in the entire market in his tenure). Starbucks, on the other hand, has been a very mediocre stock (until today anyway).
Chipotle’s stock has performed nearly 20X the returns of Starbucks from 2018 through last week.
So it’s probably not shocking that Starbucks is looking to shake things up. They just reported another challenging quarter last month. Same-store sales fell 3% (the second straight quarter of decline) while traffic through stores fell 5%.
US sales at Starbucks fell 2% during the quarter while over the last year, Starbucks shares have dropped 23%…
Starbucks’s former CEO Schultz called for a strategy overhaul back in May in a post on LinkedIn as the coffee giant slowed, but it doesn’t appear they were willing to give him a longer leash to make that vision come true.
So what went wrong over the last few years?
Maybe people got tired of paying $8 bucks for a cup of coffee, maybe the little option to tip the barista turned even more people off feeling like they were obligated to pay even more, maybe the politics played a bigger role than we realize… In reality, there’s no obvious “one thing” that has led to one of the bigger management shakeups of the decade.
The big miss, in my view, is that Starbucks has remained pretty stagnant as a product and experience over the last decade. While the market has shifted back to “boutique” experiences with small corner shops getting more love from the coffee culture, Starbucks didn’t adapt.
As AI has entered the world in full force, Starbucks hasn’t seemed to offer unique concierge services like many other retailers.
And, yes, it’s just too darn expensive to thrive in an inflationary environment where people are trying to watch their budget.
But determining the biggest flaws in Starbucks shrinking business is yesterday’s concern. Today, we need to determine whether there is continued upside after a monster 25% move in the underlying stock.
Arguably, even more critically, is CMG done? It already had taken one of its biggest beatings in the last decade and this is another big hit for one of my favorite stocks.
Well, so far, I like short Starbucks and long Chipotle.
Don’t get me wrong, CEOs matter… a lot. But I don’t think the core value and opportunity of these companies has diverged by over 30%.
Couple that with CMG already feeling like an undervalued stock to me before this additional 8% drop and that I believe Starbuck’s challenges are still very prevalent…
I just tend to think this is an overreaction on both sides.
So if I had to bet which stock would perform better over the next 6 months, my money is on the burritos.
If you want to play that trade out with me, consider grabbing some December calls on CMG and some December puts on SBUX.
I’ll keep an eye on this pair for the rest of the year and let you know if I change course.
— Nate Tucci
P.S. Don’t forget we’re talking about my dividend plan for the rest of the year.
