Starbucks (SBUX) named Laxman Narasimhan as its new CEO as the company faces unionization efforts, ongoing inflation, and dampened sales overseas.
Narasimhan will join Starbucks on Oct. 1 but officially begin his role and join the Starbucks board of directors on April 1, 2023. Howard Schultz, will remain interim CEO until next April, then join the board of directors.
In a message posted on the company's site, Schultz said Narasimhan is “uniquely positioned to shape this work and lead the company forward with his partner-centered approach and demonstrated track record of building capabilities and driving growth in both mature and emerging markets.”
Starbucks stock fell slightly on Friday.
And while Main Street consumers are captivated by the return of pumpkin spice season, Wall Street seems to be slowly taking a bite out of this CEO announcement.
In a recent note, Citi analyst Jon Tower argued that the “new CEO will be an unknown entity to many US-restaurant investors, but one who appears to have an extensive history advising and running global consumer brands, which could work to the company’s favor as the brand slowly grows its sales/profit base outside the US.”
Narasimhan announced he was stepping down from his role as CEO of Lysol maker Reckitt Benckiser on Thursday morning before being named Starbucks CEO later that afternoon. Narasimhan was credited with boosting sales of health and hygiene products at the British household goods maker during the pandemic as well as leading the company through the baby formula crisis in the U.S.
Prior to that role, he served as PepsiCo’s global chief commercial officer, where he was “responsible for the company’s long-term strategy and digital capabilities,” according to a release from Starbucks. He held various other titles at the beverage giant, including CEO of the company’s operations in Latin America, Europe, and Sub-Saharan Africa. Before that, he was a senior partner at McKinsey & Company for nearly 20 years.
Tower, who reiterated a Neutral rating and $90 price target on Starbucks stock, said the announcement “removes any additional speculation” around the CEO transition and allows the focus to return to the company's reinvention plan at the upcoming investor day on September 13.
“With the new CEO joining post the company’s investor day (when we expect plans for the longer-term playbook), it begs the question as to what incremental influence this leader may have on these plans once fully aboard come April 2023," Tower said. "We think this will need to be fleshed out at the investor event in order to gain greater long-term investor interest in the stock."
'Co-CEO structure'
There is some hesitation on the Street.
Sean Dunlop, an equity analyst on the consumer team for Morningstar, told Yahoo Finance that “the move strikes us as a curious one,” particularly after Schultz remarked on the company's fiscal third-quarter earnings call that the candidate must have “an understanding of the culture, values and guiding principles of the company. Someone who really has a conscience in terms of the humanity of Starbucks.”
Dunlop seemed cautiously optimistic, however.
“We expect the firm's reinvention plan to bear fruit — in the form of lower partner attrition, stymied union momentum, and better store-level peak transaction volume capacity,” Dunlop stated, “but time will prove the ultimate judge of the firm's current investment push.”
BTIG analyst Peter Saleh explained that the arrangement "likens itself to a Co- CEO structure" with interim CEO Howard Schultz "acting as an ongoing advisor to Narasimhan." Saleh also noted that the move "mirrors past CEO transitions including Kevin Johnson and Jim Donald, neither of which had any external restaurant operating experience."
The analyst remained optimistic that Narasimhan's global expertise will help "set the stage" for global expansion and reiterated a Buy rating with a price target of $110.
Meanwhile, Sharon Zackfia of William Blair said she was “reassured by the continued presence and guiding hand of founder Schultz and Narasimhan’s reputation.” The firm reiterated an Outperform rating for the stock.
Zackfia expects “high-single-digit to low-double-digit sales growth alongside recovering margins to yield accelerating EPS growth into 2023 and 2024.”
However, she added, the stock is exposed to a number of risks, including high levels of exposure to the U.S. and China, the impact of “unfavorable currency fluctuations, potential IT infrastructure failures or data breaches given outsized reliance on digital sales/mobile ordering, pressure from wage inflation, and execution risk as multiple growth opportunities are pursued simultaneously.”
In the coffee chain's fiscal third quarter, sales in China decreased 44%, driven by a 43% decline in comparable transactions and a 1% decline in average ticket sales as consumer spending declined due to lockdowns. Starbucks said it is treating disruptions from China's zero-COVID policy as a short-term destruction in demand.
At the same time, there are ongoing unionization efforts among Starbucks employees across the U.S.
According to National Labor Relations Board (NLRB) records, 233 Starbucks stores have voted in favor of unionization as of Wednesday, August 31, and 214 of those stores have been certified by the agency while 48 stores have voted against a union and 11 are currently being challenged.
Starbucks Workers United, the union behind the movement, also recently claimed the company closed two stores in retaliation to the unionization efforts.
While the union push has created challenges for Starbucks, the stores involved make up a small percentage of the company's more than 34,000 stores worldwide.
Starbucks CFO Rachel Ruggeri told Yahoo Finance that the company respects the process that employees are taking to unionize but “still firmly believe that the best relationship we can have with our partners is a direct relationship.”
The CFO's comments hint at the reinvention plan that Narasimhan is expected to implement, which may also address the consumer shift taking place.
Earlier this week, the Wall Street Journal reported that the company is “rethinking” how it designs its store as cold beverages increase in popularity. Cold drinks accounted for 75% of beverage sales in the recent quarter.
Mellody Hobson, an independent chair on the Starbucks board of directors, appeared confident in Narasimhan’s ability to shape the next chapter.
“His understanding of our culture and values, coupled with his expertise as a brand builder, innovation champion, and operational leader will be true differentiators as we position Starbucks for the next 50 years, generating value for all our stakeholders,” Hobson said.
Brooke DiPalma is a producer and reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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