Starbucks' Schultz To Step Down: Will The Stock Lose Strength?

Shares of coffee chain giant Starbucks Corporation (NASDAQ:SBUX) fell over 3% in afterhours trading on Dec 1, following the announcement that Chief Executive Officer (CEO), Howard Schultz, will step down from his post effective Apr 3, 2017.

Notably, Kevin Johnson – the current President and Chief Operating Officer – who served as a board member of the company for several years before joining its executive team two years ago will take over as CEO.

Meanwhile, Schultz will assume the role of executive chairman, shifting his focus to innovation, design and expansion of the high-end Starbucks Reserve Roastery concept globally.

What’s the Fuss About?

Interestingly, this is not the first time Schultz has taken a hiatus from the CEO position. Post a 13-year stint with the company, Schultz had stepped down in 2000 in order to focus on the company’s global strategy.

However, the company clearly struggled in his absence with the stock plummeting and comps declining and thus Schultz had to return in 2008 to rescue the ailing stock.

In fact, he played a major role in turning around the company’s fortunes by overseeing the expansion of the chain's food and beverage offerings and the growth of its popular loyalty program and mobile app.

Going by the company’s performance the last time he left and the impact he has had on the company’s growth story, investors’ concerns about the change are quite obvious.

Rationale Behind & Plans Ahead

Starbucks’s move toward high-end coffee is intended at refreshing its brand, which has been facing escalating competition from specialty roasters such as Stumptown and Intelligentsia, as well as from mass coffee suppliers like Dunkin' Brands Group, Inc.’s (NASDAQ:DNKN) Dunkin’ Donuts, which has been launching more high-end drinks such as cold-brewed coffee.

Schultz also aims to entice people who are increasingly shopping online to leave their homes by providing a deluxe experience via high-end coffee shops, thereby bolstering traffic.

In Dec 2014, the company opened its first such store, the Seattle Reserve Roastery and Tasting Room, a 15,000-square-foot store where coffee is roasted and customers can purchase $12 cups of small-batch reserve coffees made with a siphon brewing technique.

The massive sales performance of the company’s first such shop has in part encouraged Schultz in believing that the new concept can bring growth to the company.

Starbucks is thus planning to open 20 to 30 more of the high-end stores in prominent cities around the world. The company also plans to build up to 1,000 smaller stores reminiscent of the Roastery, under the "Starbucks Reserve" brand, barring the on-site roasting.

Starbucks is also remodeling several of its over 24,000 stores with Reserve-branded coffee bars where customers can get the same kind of coffee education and range of brewing methods as at the Reserve stores.

Interestingly, Schultz believes that the move to open high-end coffee shops marks the company's biggest strategic initiative since Starbucks began opening stores overseas 20 years ago.

Our Take

Though Schultz is pretty confident of the growth prospects of its new high-end coffee shops concept, a challenging environment in the U.S. restaurant space may actually draw few customers and in fact add to the company’s costs for building these new stores.

We note that Starbuck’s shares have been outperforming the broader Zacks categorized Retail-Food & Restaurant Market over the past six months. While the stock has gained over 7%, the broader market had witnessed a gain of mere 1% in the same time period.

Though Starbucks continues to outperform the broader market, its growth has slowed more recently and traffic trends have remained soft of late.

Thus, with the news of Schultz’s departure coming at a critical juncture, it remains to be seen whether investors would still be keen on Starbucks shares sans Schultz or will history repeat itself.

Zacks Rank & Stocks to Consider

Starbucks currently has a Zacks Rank #3 ((Hold). Better-ranked stocks in this sector include McDonald's Corp. (NYSE:MCD) and Papa John’s International, Inc. (NASDAQ:PZZA) . Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for McDonald's full-year 2016 earnings climbed 2.3% over the last 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 6.16%.

Papa John’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 11.31%. Further, for 2016, earnings per share are expected to grow 19.9%.

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