Motley Fool Hidden Gems Investing - Meet Starbucks' New Boss (Same As The Old Boss)

Episode Date: March 16, 2022

Kevin Johnson surprises almost everyone by announcing his retirement, with Howard Schultz returning (again) to run Starbucks. (0:20) Jason Moser discusses: - The company's board of directors taking their time in searching for the next permanent CEO - Why Walgreens' CEO Roz Brewer should be at the top of the board's list of candidates - Starbucks' plan to reduce the use of disposable cups by 2025 (12:00) Emily Flippen and Asit Sharma take a closer look at a stock that's returned 250% over the past five years: Intuit. Stocks discussed: SBUX, INTU, ADBE Host: Chris Hill Guests: Jason Moser, Asit Sharma, Emily Flippen Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. If you're looking for a new job, we've got a $95 billion company that's suddenly in need of a CEO. Brush up your resume, Motley Fool Money starts now. I'm Chris Hill, joined once again by Motley Fool Senior Analyst, Jason Moser. Thanks for being here. Jason Moser. Hey, thanks for having me. After five years as CEO of Starbucks, Kevin Johnson is stepping down effective April 4th. Former CEO Howard Schultz is returning as interim CEO. The Board of Directors has said they are going to begin their search and announce a new CEO in the fall. They have

made it very clear that Schultz is there on an interim basis. He's not there for a long-term stint, which I believe would be his third as CEO, but he's the interim for now and helping to guide this new process. Shares of Starbucks are up about 7% this morning. Jason, this is my largest holding. You would think if someone's largest holding is up 7%, they feel really good about that. Yet, I don't. It's because of the news that Kevin Johnson signaled to the board of directors a year ago that he was going to do this. And I am left wondering why they are just starting their search now when they've had a year to consider who's going to fill his shoes. Chris, it feels to me like you are viewing this as the coffee mug half empty.

That is exactly right. Okay. Okay. I just wanted to make sure. I wouldn't say I necessarily view it that way. It's interesting news for sure. It does seem like it came out of the blue. Now, I will say, in going through and learning more about this this morning, there was an interview with board member Melody Hobson that I think clarified a little bit of the questions that you have here. The board, they say they weren't surprised by this. They've known about this for a year essentially. Part of the problem is that due to all of the restrictions and chaos over the last couple of years, it's just not been very easy for businesses to get things done. A lot of things

have gone virtual, but we're seeing that obviously change back now. It's not the case anymore. but she noted that, I mean, listen, they're not going to hire a CEO over Zoom. And hey, listen, I applaud that. I mean, I thought that was really great to hear, because it tells me that they're taking this very seriously. They've been giving this a lot of deliberate thought and they wanted to make sure that they approach this with no half measures, so to speak. And so, it does sound reasonable that, yes, the board didn't know about this a year ago. It does sound reasonable that they've just not had the ability to really go out there and search for the appropriate individual to fill Mr. Johnson's role here. Now, obviously, that's changed. Thankfully for them,

they can fall back on Howard Schultz. I'm sure he's probably doing his best Michael Corleone right now. Just when I thought I was out, they pulled me back in. At some point, they're going to have to move on from Howard. That is nice to have him in the back pocket there, so to speak. It sounds like they're getting him for a song. I think what they said is compensation for this is going to be a dollar. I suspect that he is very happy to come in here and fill this role very temporarily as the board ramps up its search. Hopefully, they do take this very seriously and are able to find someone who can fill this role for a long time to come. Because this is one of the quintessential American businesses. Tremendous brand. Obviously,

coffee is a market that's not going anywhere. As shareholders, you and I both, and I'm sure all shareholders out there, they want to see someone get in here and really help take this company to the next level. Kevin Johnson has done a wonderful job, but it sounds like he's ready to move on. Hopefully, they're able to find someone sooner rather than later. This could be the CEO hiring version of what we saw with Disney+, where Disney said they wanted to launch their streaming service in 2016, then they pushed it back to 2017, 2018. Finally, when it came out in 2019, right before they launched it, I think collectively as shareholders and as investors, we looked at this and said, well, you better nail this because

you've been putting it off long enough, and they did right out of the gate. If six months from now, they make an amazing hire, then all is forgiven. But I do think two things in terms of the hire. one, they really need to nail this. You can say that about any CEO hiring, but I think the fact that they knew about this for a year and didn't have a plan in place other than, well, we're going to start our process once he leaves. The other thing is, I'm assuming they're going to hire someone from outside the company because they've got a CFO and a Chief Operating Officer who have been at the company for 20 years, and maybe either one is the right candidate for the job, but it would be weird if six months from now they came out and said, okay, we've done our search,

and it was someone within the company all along. Yeah. It does feel like they would be bringing someone in from the outside. Golly, who knows who it could be, right? I mean, all of a sudden, you get Domino's. Rich Allison probably gets thrown on the radar here just because of his familiarity with that industry, food and beverage. He's obviously getting ready to step away from Domino's. I'm kidding there. I don't think that's going to be the case. It sounds like Rich is ready to go off and do other things as well. Listen, this would be a great gig, I would think. Shoot, I'm really actually entertaining the idea of throwing on my resume. Let's be clear, I'm not getting any younger, Chris, and I drink a ton of coffee.

I feel like, hey, they get a lot of my money. I'm pretty familiar with that business. I've been covering it for a while. I love Starbucks. I'd go in there and interview. I'm all for not interviewing on Zoom. I'd love to take a business trip and go check out Starbucks HQ. I don't think they'll have any issue on the demand side. I think there are a lot of folks out here that would really love that gig. It does feel like looking outside might be the way to go here. But yeah, you never know. It's funny how talent pops up sometimes on the radar and it's often somewhere where you just least expect it. But yeah, it's going to be an interesting process for sure. I would think the first phone call they place is to Ross Brewer, the CEO at Walgreens,

who was a longtime executive at Starbucks and left about 15 months ago to take the top job at Walgreens. I'm assuming she's going to be on the shortlist or at least in the conversation, but we'll see. I feel like she should be at the top of the list for that search. It feels like Starbucks would be a more enjoyable job than something like a Walgreens. Let's be Frank here. That name, that's the Starbucks name. You got a CEO of a coffee company named Brewer, it just doesn't get any better than that. The stars are lining up. I would imagine they are placing a call to her to gauge her interest because she may have felt like that opportunity just wasn't going to be on the table here a year and a half ago. It's very understandable

that she took that job. But given her familiarity with the business, with the company, with the culture, I would have to believe that she would be at the very top of the list of consideration. Last thing and then I'll let you go. A lot of times when companies are looking to hire a CEO, one of the questions they ask is some version of what new plans would you bring to the table for our company. In the case of Starbucks, one of the questions they're going to be asking candidates is, yesterday we announced a plan and we'd like your thoughts on how you're going to implement it because this plan is important to us. A plan that got overshadowed by the news of Kevin Johnson leaving in a couple of weeks and it's Starbucks coming

and saying by 2025, they want to get rid of disposable cups, which from an aspirational standpoint and an environmental standpoint, I think is wonderful. I think that's going to be difficult to execute completely, because if you just think about people traveling and Starbucks in airports and train stations and hotels and that sort of thing, that might be tough to pull off. But do you think this plan, which appears important to the business, do you think that makes it easier or harder or has no effect on their ability to get the candidate they want in the corner office this fall? You mean the cut plan, the waste plan? So yeah, I mean, I agree with you. I think from an aspirational view, hats off. That's a terrific

goal. I think it's going to be very difficult to execute in full, just given the nature of business and the convenience factor, it reminds me of the plastic grocery bags. It takes a little bit of thought on the consumer's part to change their behavior a little bit. For example, now I keep a grocery bag in my car so I can just avoid those bags. But then also recently here in Fair Fairfax County, they implemented a five-cent plastic bag tax. If you use those bags, now it's interesting because you're on the honor system there to actually pay that tax when you check out. Maybe there are some incentives, maybe there are some creative ways that they can cut back the waste. I think eliminating that waste fully is going to be next to impossible

to do. But I have to believe that it would be something that they would be asking. That be a very good interview question. How do you approach that problem? What is your philosophy there? Because you might have some CEOs that are all on board and say, yep, eliminate it 100%. But then other CEOs may come in and say, well, that's aspirational, but it's not very practical, so perhaps this is another way we could approach that problem. I think that would be a terrific interview question and I'm sure it'll be asked and I'm sure you'll get a wide range of answers. But, yeah, that's going to be, I mean, that's going to be something that Starbucks is going to be one of many companies, I think, really trying to pursue strategies in cutting back

on waste and becoming a little bit more environmentally friendly. Alright. Well, start thinking about how you're going to answer that when they interview you. I'm already writing the notes down, Chris. Jason Moser, thanks for being here. Thank you. Shares of Starbucks have done pretty well over the five years Kevin Johnson's been running the company. One stock that's performed even better is Intuit. The financial

software stock has risen 250% during the same time period. For a closer look at Intuit, here's Emily Flippen. Thanks, Chris. Emily Flippen here. I am joined by Motley Fool Senior Analyst, Asit Sharma. Today, we're going to be talking about a tax specialist, Intuit, and thinking about it as an investment. Asit, thanks for joining. Asit Sharma. Emily, so good to be back with you again. I have to kick off with a fun question here, which is, we're talking about Intuit, it is tax season. Asit, have you started your taxes yet? Well, Emily, I actually have in my own

idiosyncratic way. About this time every year, I get a call from my dad, and he is something of a trader, even though I've tried to make him more of a long-term investor over the years. And I got a call from him just a few days ago, and he said, hey, son, can you help me out? I had all these cryptocurrency transactions. I got to figure out how to account for them before I see the CPA. That call from my dad, which is different every year, is always the trigger for me to start gathering my stuff together, which I did a little bit of this weekend. But to be completely honest, have I, in any bona fide way, started my taxes? No. How about you? Me being the anxious person that I am, the moment I get all my forms, I like to just get it out of

the way and do it. And I have to say, I don't have particularly complicated tax filings. I'm not making real estate investments at my age. So there's really no reason why I should mess up my taxes. But I'll tell you what, every year, I seem to manage to do something wrong. And I imagine I speak for a lot of Americans, especially when I say that I do like to use simplifying software, if you will, talking to those live experts that Intuit has made a very lucrative industry out of. So it's certainly the season to be thinking about Intuit, especially considering the fact. But I think a lot of people are also, you know, maybe this is their call to start thinking about doing their taxes. Apologies if it hadn't crossed your mind and now you're stressed

out. Yeah. And I tell you, that's the most Emily Flippen thing ever that I've heard that you get your tax forms in, you're ready to go, which I'll get there one day. Yeah, but this is interesting, Emily. It's top of mind during tax season to think about investments like Intuit. They have their flagship product, TurboTax. But over the years, they've evolved into other spaces. I mean, they have a big self-employed and small business tax software business in QuickBooks Online. They also have a personal finance arm in Credit Karma, which they recently acquired. They even bought MailChimp recently to integrate with their small business software to help small and medium-sized businesses market a little bit better. This is not the old Intuit

that we're used to seeing. This is a forward-looking company these days. Would you agree with that? Definitely. I'd say a lot of consumers may just be familiar with TurboTax. Maybe you have a sour taste in your mouth depending on your opinion about that software solution, but it's important not to overlook the small and medium-sized business market because that is into its fastest growing segments. If you are somebody who works with the finances of corporations, you may be familiar with QuickBooks, but if you're not, you should know it is just as pervasive, if not more so than TurboTax is during tax filing season. QuickBooks is the go-to accounting software for, I'd say, the majority of small businesses in the United States.

Agreed. Something that will be new to investors who haven't followed into it for many years, they actually are trying to extend a little bit beyond this small and medium-sized business group with their accounting software with QuickBooks Online into something called the middle market, which is typically, depending on the definition you use, a bit larger-sized market than the small and medium-sized company market. It's also a lucrative space for them to play in. These are companies by some definitions, the one I use at least, that have at least $5 million or $10 million in annual revenue. Other definitions I've seen say that middle-market companies have at least 100 employees. There are many ways to slice it. Bottom line, Intuit is starting to target

larger businesses. They're not going out and competing with big enterprise companies and trying to offer their accounting software to large corporations, but they're expanding aggressively into what's a new realm for them. I think that's important to recognize too, because a company gets this big, Emily?" We begin to ask the question, how do they keep growing? Emily Flippen. I think that's a fair question to ask because I think if you're investing into it, you're not doing so because you just think TurboTax is that pervasive, although they are still making so many improvements to that software, connecting with the live experts being one of them, advanced refund programs being another, but you're really investing because you believe in

their new verticals. You mentioned that acquisition of MailChimp. It was a $12 billion acquisition, so by no means a small amount of money to spend. That's their push into email marketing. Credit Karma is another big one, which is what they call under their five big bets, unlocking smart money decisions. Pushing into things like insights, financial product advice, auto and home advice. This is a lucrative industry. A growing industry certainly offers the opportunity to grow into its top line faster than it's grown historically, but it's also extremely competitive. It's understandable that investors may have a bit of doubt saying, okay, Credit Karma, but also Intuit is coming into this space. How are they going to be the winners? I think it's a fair suggestion that we

consider where does this thesis perhaps begin to break a little bit. To me, it breaks if they don't keep up with cutting edge technology to draw all these various strands together. I mean, this is a company now that's playing in tax, small business accounting software, personal finance, email marketing, as you mentioned, Emily. One of the unifying threads that management likes to talk about is the emphasis on machine learning and artificial intelligence in each of these areas so that they can stay ahead of the curve and keep supplying their customers with ways to reach their own customers, especially in this small business segment. One of the answers to that is going to be technology, I believe, going forward. I don't think we've seen the end of

Intuit acquiring companies. Now, we might not see large acquisitions of the size of Credit Karma, as well as Mailchimp in the near future. I think they're pretty exhausted on that level, but I wouldn't be surprised to see many more small bolt-on acquisitions that fill those technology pieces that enable them to keep selling. And CEO, Sasan Ghazari, I think has that innovation focus that is both wanting to grow Intuit while still maintaining its really stalwart financial picture. This is a company that has gross margins above 80%, free cash flow margins consistently above 25%. They are making money hand over fist in this industry, which offers them a lot of opportunity to not only pay a dividend, which they do

consistently do and raise, but also reinvest into the business. Looking at that R&D to say, how are we going to be the winners in this space? It's important that whatever new verticals they push into, whether it be payroll management for small to medium-sized businesses, getting more into the enterprise clients, getting more into financial advice for consumers, that they maintain that strong margin picture. They're in a well position to do so. Again, being able to reinvest that cash is critical, but it's worth keeping an eye on those margins over time. Totally agree. I think that this strategic element that Sasan Ghadarzi has brought in the the few years he's been CEO, plus cost discipline is going to be helpful to them. I think they

manage their fixed cost base pretty well. We saw in this second quarter Intuit grow its total topline by 70% year-over-year. Now, they had revenue from acquisitions propelling that, Emily, but when you take out those acquisitions, their organic growth was still pretty strong. It grew 39% year-over-year. That type of revenue growth makes it easy to drop profit onto that bottom line. But of course, this is going to normalize. This growth will normalize over the next few years. I think they can still grow at maybe a 15% rate annualized for the long-term, maybe closer to 20%. That's pretty strong for a business that is this big. It's got room to grow, but they're going to have to be pretty strategic, as you mentioned, attack the right verticals in

their various markets and keep thinking about how they can innovate within their customer base. I would add to that one last thing, how well they can cross-sell between these products, taking a customer who is a TurboTax user and being able to sell the personal finance products that come via the Credit Karma acquisition on through their whole product suite. That's going to be an important piece too going forward. I'll also add that I think a risk that investors should keep in mind is that for the most part, Intuit is a consumer-facing business. They have had a lot of backlash from consumers and tax filers about the lobbying the business does, in particular to keep tax laws in the United States somewhat opaque. It's important to keep

in mind that that is an existential risk for this business and maybe prohibitive for some investors. True. One more I'll mention is that it's been very easy for Intuit to grow its tax practice between TurboTax and small business taxes. They actually have a group that's just focused on small corporate taxes. They've been able to grow QuickBooks online among freelancers and entrepreneurs at a rapid rate. But this next phase of growth is going to be harder. When you break into the middle market, there's already established software companies there that are pretty robust. Again, it's not the same thing as competing with the really, really big guys in that corporate software market, enterprise resource planning, but there's competition

they will have to show their mettle against in the coming years if they want to expand that QBO, QuickBooks Online product, into this slightly bigger space. As a last question here, Desert Island asked, if you had to choose between Intuit, Paychex, or Adobe, which are you buying and why? This is a hard question, Emily. We were chatting in prep for this, and you had a different list, which I like, because it made my answer easy. I'm a glutton for punishment this week, so I chose the harder version, which this is. I will tell you, I've admired Paychex for a long time because their revenue stream is very predictable. They spend a lot of money on machine learning, so

they've got bots, which help them make their payroll process more efficient for their customers. years, high-margin business for a payroll company, steady growth. What's not to like about Paychex? Now, I think Intuit is one level up versus Paychex, right? I think the strategy under Cezanne Ghadarzi and also his team in general, his CFO, Michelle Clutterbuck, I think this is a well-run company which is going to figure out how to keep growing even as a big enterprise over the next several years. But now we come up against Adobe, which which is a gold standard of exploiting intellectual property. You have to love what they've done with Adobe Creative Cloud. There's such a stalwart business, innovative business, beautiful

subscription model. Here's what I'm going to say. I'm going to go with Adobe, but suppose I take a vacation in a year, I get shipwrecked again. I want to revisit this. I think I'm seeing some stuff in Intuit that might change my mind if I were shipwrecked the second time on a desert island. I hate to weasel like this, but let me hear your thoughts, Emily. I agree with a lot of what you said, but I really like the direction that Intuit's headed in. I really believe that Gadzari has a big vision for this company. So I think Intuit takes the cake for me. But regardless, this is an industry across all these businesses to keep our eye on. And Asit, thank you so much for your time and joining me today to chat about it.

A pleasure. Thanks, Emily. That's all for today, but coming up tomorrow, we're going to talk about Russia's stock market and what it means for investors outside of Russia. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. you Thank you.