A change in CEO can have a significant impact on a company's growth strategy and a stock's overall trajectory. And that's what Starbucks (SBUX 0.34%) is hoping for, after luring away Brian Niccol from Chipotle Mexican Grill (CMG 1.42%) earlier this year. The company made great efforts to do so and is paying the executive a significant compensation package to help the coffee chain get back to generating strong growth numbers.
Shares of Starbucks have been rallying since the news but while optimism is high from investors of late, the coffee stock is by no means a slam-dunk buy at this point, as it does come with its fair share of risk. And while Chipotle may have lost its CEO in the process, here's why I think the stock will outperform Starbucks over the next five years.
Chipotle has a lot more room to grow
In recent years, Chipotle has been seen by many analysts and executives as the ideal growth business. Many businesses often try to be the "next Chipotle" because of the restaurant chain's impressive results. And it's hard to argue with that given the company's impressive numbers and sheer growth over the past five years.
CMG Revenue (Annual) data by YCharts
While Chipotle may have lost its leader, Scott Boatwright has been named the interim CEO. He has been with the company for seven years and has served as its chief operating officer; there likely won't be a significant change in the company's long-term growth plans. The business has been taking off, and what's encouraging is that there are still more opportunities out there for Chipotle. It owns and operates more than 3,400 restaurants all over the world. It's also targeting an annual growth rate between 8% and 10% for the foreseeable future.
By comparison, Starbucks has a much larger footprint, with over 39,000 stores worldwide. For Starbucks, the strategy isn't as simple as opening more locations to grow its earnings, as it could run the risk of cannibalizing sales at existing locations or expanding into markets where the growth prospects may not be ideal. The company's new CEO has his hands full with a lot of locations to potentially evaluate and review, which is why a drastic improvement in the company's lackluster earnings numbers may not come easily.
Starbucks' exposure to China could put pressure on margins
Starbucks investors will want to keep a close eye on how Starbucks performs in China, where it has more than 7,300 stores. It's a key market for the company, and with rising competition there, particularly from Luckin Coffee, not only could Starbucks' growth prospects be hurting but so too could margins as intense competition may make it difficult for the company to maintain strong market share while keeping prices high.
In its most recent quarter, which ended on June 30, Starbucks' revenue in China was down 11% year over year. Comparable-store sales (which only factor in stores that were open a year ago) looked even worse as they were down 14%, which is far worse than the 2% decline the company experienced in North America. The company faces a tough road ahead, especially with the Chinese economy struggling this year. And with growing competition there, things may not necessarily get easier for Starbucks in the months and years ahead. If it can't find a way to significantly improve its operations in China, the stock's rally may be limited.
Chipotle looks like the better stock to buy today
Starbucks has been the hotter stock over the past three months, with 22% gains over that stretch, vastly outperforming Chipotle (it's up around 12%). However, with some significant challenges ahead for the company's new CEO, I'm not overly optimistic that this will be the start of a prolonged rally for the popular coffee chain. It's hype rather than stronger financial results that are fueling the stock of late, and that's not going to be sustainable in the long run.
Chipotle may have a much easier path to generating sustainable growth in both the short and long term, which is why I would expect the stock to be the better buy over at least the next five years.
