With Starbucks Redesign Lacking Details, Investors Anxious for Meeting

Bloomberg — Howard Schultz took the helm of Starbucks Corp. (SBUX) more than five months ago pledging a massive reinvention of one of the world’s largest restaurant companies. Until now, the details have been vague -- but that’s expected to change at Tuesday’s presentation to investors.

Starbucks is expected to explain plans to redesign cafes -- with analysts saying the company will likely home in on-delivery and carryout-friendly formats. The company is also under pressure to deliver more financial details on what those makeovers will cost in the long term, and what impact kitchen upgrades and higher salaries will have on the bottom line.

“It’s a pretty long list of things that need to be sorted out,” said Ben Wong, an analyst at Motley Fool Asset Management, which owns about 136,000 shares. “How much are the continued investments in the employees and stores, and how much is that going to impact margins?”

Since becoming interim chief executive officer in April, Schultz has said the company is overhauling the Starbucks experience along five broad points, but there’s still uncertainty about what they mean in practical terms over a longer horizon. The company, which has said it’s spending about $1 billion in fiscal 2022 on higher wages and improved stores, suspended its financial guidance for the year amid uncertainty in the key growth market of China.

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Incoming CEO

Starbucks removed one key question mark earlier this month when it announced Laxman Narasimhan will succeed Schultz as CEO. The 55-year-old, who’s coming from UK consumer-goods maker Reckitt Benckiser Group Plc, will join the Seattle-based company in October and embark on an extended tour of its operations before becoming CEO in April.

The period will be crucial for realizing Schultz’s vision for the company. Starbucks in the past has closed and relocated less-profitable locations, and is now closing some stores due to security problems while adding more drive-thrus and delivery-focused stores. Remodeled cafes also are supposed to make baristas’ jobs easier and less stressful.

Key hurdles include a unionization drive which has grown to more than 200 US locations, and uneven performance in China amid ongoing pandemic restrictions. Wong flagged both China and the labor push as adding layers of uncertainty for investors.

Starbucks’s move to raise US barista wages to an average of $17 an hour and give additional bumps to more tenured staff hasn’t stopped the union drive that’s become increasingly contentious. The company is trying to convince employees that they’ll be better off if they don’t unionize.

The pay increases, along with supply-chain and commodity inflation, have weighed on Starbucks profitability despite menu price hikes.

Equipment Details

Meanwhile, the lack of specifics around additional equipment and technology expenses is keeping a lid on the share price, according to BTIG LLC analyst Peter Saleh, who expects the company to “provide a lot more detail” at the investor event, including information on capital investment and what that means for long-term profitability.

“They have more cash on the balance sheet than they need,” he said in an interview. “And I don’t know where they’re going to spend it, or how they’re going to spend it.”

Starbucks had more than $3.2 billion in cash and short-term investments as of July 3. After returning as interim leader, Schultz’s first move was to suspend the company’s buyback program, saying the money could better be spent on stores and employees. Thus far, the chain has been deploying new coffee brewers and warming ovens, improving training and experimenting with new types of stores.

Any changes to the store format are of crucial importance for Starbucks, which came up with its concept of the “third place,” where customers spend time between work and home. While Starbucks has always said the third place won’t go away, it has been building smaller locations geared to pickup and delivery. And about 90% of its new stores include car lanes -- taking a page from fast-food chains rather than relaxed coffeehouses.

Starbucks, which has more than 15,000 stores in the US, is poised to accelerate store growth under the new CEO, Credit Suisse analyst Lauren Silberman said. She predicts cafe layouts will be adapted to better accommodate to-go orders. For example, Starbucks could add pick-up shelves, such as those used by Chipotle Mexican Grill Inc., to get customers in and out faster.

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“I don’t see it as much as complete remodels as reconfiguration,” she said of the plan to update locations. Silberman also sees a more personalized Starbucks app coming, with features such as text messages and games to engage diners.

Starbucks is betting its presentation can win over skeptical investors who have sold off the stock in recent months amid economic uncertainty and profitability concerns. The shares have lost 24% this year, more than the 15% decline of the S&P 500 Index.

“In order for the stock to perform, then a lot of those issues probably have to be resolved,” Wong said. “Everyone is looking forward to the upcoming investor day.”

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