Schultz’s first steps at Starbucks hint at deeper changes to come

(Bloomberg) – In his first week back at work at Starbucks Corp., Howard Schultz made a series of moves that hint at big changes in store layouts, employee relations and marketing – and indicate that profit margins will be under pressure.

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The man credited with inventing Starbucks’ culture as a “third place” for people to spend time away from their homes and workplaces doesn’t take his newfound lightly role of interim CEO. He has already frozen share buybacks that were part of a $20 billion package, saying the money would be better spent on employees and improving cafes. And he fired the company’s top lawyer while pledging to provide better benefits to workers to deter them from joining a union.

Shareholders welcomed Schultz’s plans by selling the stock, which has fallen every day this week for a 10% slippage. It’s a sensitive time because Starbucks is already dealing with a deluge of expenses. In February, the chain said it was seeing rising costs for isolation allowance and training for its workers, as well as pandemic-related supply chain issues. Estimates compiled by the Bloomberg Project’s operating margin will shrink to 16.3% this fiscal year from 16.8% last year.

“He’s coming back and he’s taking bold moves,” said Ivan Feinseth, an analyst at Tigress Financial Partners, which has a buy rating on the stock. Feinseth thinks investing for the long term is the right idea, even if there are short-term challenges.

“It’s going to put pressure on the margin, absolutely, but I don’t think that’s a factor. He knows that.

Feinseth said Schultz’s changes could include expanding the sale of food and wine in the evenings – a move the company has experimented with in the past. “They will always try to fix issues that will drive traffic overnight,” the analyst said. “He wants to deepen the premium experience.”

Schultz led Starbucks’ aggressive expansion through the 1980s and 1990s before stepping down as CEO in 2000. He returned as CEO from 2008 to 2017. On his third go-around, the 68-year-old years also joins the board of directors and the management day. -day-to-day operations as the company searches for a new leader – a process it expects to complete by the fall.

Latte or gas?

Earnings estimates are down about 3% year-to-date as inflation picks up and Russia’s invasion of Ukraine rattles commodity markets. A large $4.25 plus tax latte now costs less than a gallon of gas in Seattle, where Starbucks is based.

Inflationary pressures are also hitting staples like coffee and dairy. Starbucks is less immune to price increases because it owns and operates individual restaurants, unlike the franchise model used by other chains, including McDonald’s and Dunkin’.

Starbucks is raising salaries in the United States this year to help retain staff. Schultz also told employees that the company would launch into non-fungible tokens before the end of 2022 to capitalize on its “treasury” of collectibles and rich heritage. He this week met with workers in China, a key market for growth that has recently come under severe trade pressure with the resurgence of viruses.

Other changes could be on the way, such as cafe renovations, new menu items and additional technology for the company that pioneered mobile ordering and payments in the restaurant industry, said Ben Silverman, director of research at Verity, which advises institutional investors.

Silverman said Schultz’s biggest moves could involve changing the company’s plans for new locations. “Commercial real estate has changed a lot due to people working from home and not really going to the office,” he said. “It changes the equation.”

Schultz said he won’t make all decisions based on share price or impact on earnings. The stock is now down nearly 30% since the start of the year.

All of these moves underscore Schultz’s “longstanding position as a champion of change,” said Brett Levy, an analyst at MKM Partners. While the strategy may put pressure on margins, it could also help Starbucks refocus on organic growth and shareholder return, he said.

“The next two quarters shouldn’t expect to see him sit idly by waiting for a permanent replacement,” Levy said in a research note.

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