COVID-19 has been brutal for coffee king Starbucks (SBUX -0.35%). Although it's rebounded from earlier sales declines and is posting record revenue, it's still dealing with regional challenges that threaten to close its dining rooms in some areas, as well as rising costs and worker unrest.
The company's stock has been depressed as investors are uncertain about how to value the company in these trying times. Its price has lagged those of similar restaurant chains, and is down 27% over the past year.
To add to the uncertainty, CEO Kevin Johnson announced that he will be stepping down at the end of the fiscal year. While the company searches for a new leader, founder Howard Schultz is moving back into the driver's seat for the third time. What does this mean for Starbucks?
Image source: Starbucks.
Two difficult years
Starbucks' sales suffered at the beginning of the pandemic after years of comps increases. To meet demand and generate sales when its dining rooms were closed, the company ramped up opening new drive-thrus and improving its digital experience. The company is now in a different place, having closed many of its urban shops and started operating a digitally focused and more agile business. Sales reached record highs over the past two quarters, including a 19% year-over-year increase in the first fiscal quarter (ended Jan. 2) to $8.1 billion.
But the challenges are far from over. Omicron breakouts led to disruption in store hours and volume in the first quarter in China, one of Starbucks' leading markets. Inflation and rising costs are both impacting operations as well. And management is also dealing with workers' continued efforts to unionize.
Amidst all of this, Kevin Johnson, who has been at the helm of the company for the past five years, announced his retirement from the role of CEO. Although the company didn't say why he was leaving, there's enough pressure at the company to see why a CEO would need a break. He said he signaled to the company last year that as the pandemic neared closure that he would move on. "I feel this is a natural bookend to my 13 years with the company," he said.
Johnson originally took over the CEO role from Schultz, the visionary who led the company in its early stages, taking it from a handful of stores in Seattle to tens of thousands of stores worldwide. Schultz initially left the company in 2000, but was compelled to return in 2008 as the company struggled with its growth strategy. He rebuilt Starbucks' vision, focusing on stores as a place for connection and the company's commitment to an ESG (ethical, social, and governance) platform.
Schultz handed over the reins to Johnson in 2017 and retired from the board in 2018. But as the company searches for a new CEO to lead it into the next generation, Schultz is back in the top spot, taking care of the business to have it ready for the new leader.
A vision to move forward
Wall Street reacted positively to the news, hopeful that a fresh perspective can move the sluggish stock price. In the meantime, having Schultz back at the company is also a positive step. Having built the company into what is it today, he has intimate knowledge of its inner workings, as well as a visionary approach to branding and development. Chair of Starbucks' board Mellody Hobson said:
As the company navigates the aftermath of the pandemic and socio-economic forces impacting the lives of all our stakeholders, Howard will reinforce the company's culture, underscoring the organization's commitment to innovating and executing on our core purpose and reason for being: to inspire and nurture the human spirit--one person, one cup and one neighborhood at a time.
At its reduced price, Starbucks stock trades at 23 times trailing 12-month earnings, which is in line with the multiples of similar restaurants. It also pays a dividend that yields 2.2%. This may signify that Starbucks' stock is undervalued, and with Howard Schultz leading the company again for an interim period, now might be the right time to consider buying shares.
