Motley Fool Money - How Starbucks Can Turn Around

Episode Date: September 10, 2024

Brian Niccol, the former CEO of Chipotle, began leading Starbucks earlier this week. Transforming the coffee shops back into third places will be a tough task. (00:21) Jim Gillies and Ricky Mulvey discuss: - The situation that Niccol is coming into at Starbucks. - Why previous leadership at the coffee giant didn’t work out. - A sporting goods retailer that may have reached bottom. Then, (18:22) Robert “Bro” Brokamp kicks off a two-part interview with Dave Hatter, a cybersecurity consultant at Intrust IT, about the Social Security database hack and how to make your personal information more secure. Visit our sponsor www.factormeals.com/foolpod50 Join us at our live podcast recording in Denver with Bigger Pockets on Wednesday, September 18: https://www.meetup.com/biggerpockets/events/303028272/ Companies discussed: SBUX, ASO Host: Ricky Mulvey Guests: Jim Gillies, Robert Brokamp, Dave Hatter Producer: Mary Long Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate C. According to Indeed data, sponsor jobs have four times more applicants than non-sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsor job credit at Indeed.com slash podcast. Terms and conditions apply.

Happy first week of school to Brian Nicol. You're listening to Motley Full Money. You'll be joined today by Jim Gillies. Jim, good to see you. It was good to be seen, Ricky. Well, yesterday, former Chipotle CEO, Brian Nicol, you know, he grabbed his lunch pail. He hopped on his private jet and started his first day leading Starbucks. Interesting company to look back on because sort of long, long term, Starbucks has been a fabulous performer.

but over the past just five years, it's just been paying dividends. So on Mr. Nichols' first day of school, what's the situation he's walking into, into this new high school with new friends, new opportunities? Uh-huh. I'm going to suggest, well, I like that you said that Brian Nichols taking his lunch pail because I would suggest the first thing is it's a good thing he's not eating at Starbucks because I'm of the opinion that Starbucks has never gotten food right, unless you like pre-made sandwiches made a month ago in a fact.

in Denver. And I think that might be something that he's walking into. I think he's also walking to. Starbucks was famously always the so-called third place between work and home. A third place where you could gather, maybe if you're like me and a remote worker, you know, who sits at a desk and needs a little bit of downtime from sitting at the same desk always. So I go to a Starbucks who sit at a different desk. The third place has kind of disappeared. Starbucks has kind of evolved under the leadership. And you can insert in air quotes if you want there. The leadership over the past six or seven years is kind of evolved from a coffee shop,

more low key to get in slash get out with your sugary fru-frew beverage of choice rather than the focus on coffee. And so I think my take is I think there's a lot of things he's going to need to do to get back to get back to where they were. I've got a Beatles song on my head, get back. Get back to where you once belonged. I think that would probably be a good start for Mr. Nickel, but he's going to have a bit of a slog, I think. You've got British bands on the brain. We'll see why in a little bit. There's one person he needs to make a fan of. And the former CEO, Laxman, Narasimmon, definitely did not have a fan in Starbucks founder Howard Schultz. What does Mr. Nickel need to do?

to make Mr. Schultz a fan of him as CEO. Oh boy, Ricky. Can open worms everywhere. Thank you for that setup. I don't give a rat's hindquarters what Howard Schultz thinks of Brian Nicol. I think we are in the spot where you have to hire Brian Nicol because Howard Schultz mess this up so thoroughly. He needs to sit down, shut up, and count his money. You say the last guy, Howard Schultz wasn't a fan. I say the last guy was hired, scouted, and worked at the feet of Howard Schultz for 18 months. Howard Schultz cost Starbucks through that last ego-driven. You know, I'm going to hire the next rock star that's going to take Starbucks into its next phase of growth. He scouted him.

He had a six-month internship where he was sitting at the feet of St. Howard. And then he was released into the wild. And then he was gone in less than a year. That's Howard's fault. And Brian Nichols is here to take over from the mistakes of Howard Schultz. Not quite the take I think you were expecting me to give you. Well, you know what some might say. This is a little bit like, first one was General Electric after Jack Welch.

you got Bob Eiger in the notes here anytime you have these force of personality CEOs I think there's something in their brain where they want someone to come in and do a competent job but they can't have someone that you know because no one can really do the job as well as they can so you know maybe there's a little sandbagging

going on next question I was going to say do you want me to lead it a bit more with Bob Eiger but I think we'll leave him alone for now we can set that aside I will just say I don't think nickel needs to make Howard Schultz a fan I think Brian Nicol, and, you know, look, he's already got a really good track record with

First Taco Bell and then later Chipotle, obviously. He's already made a boatload of money. He can tell Howard to go pound sand if Howard gets a little too familiar. But it's important to realize Howard's no longer on the board even, I think. He's pretty much out. Yes, he's got a big equity stake. But I think we need to walk away from the Howard Schultz era of Starbucks. He did a fantastic job for decades.

But his time has passed. Let Brian Nicol cook. The investors are certainly excited about Brian Nicol. He got an 18% pop when he was announced to CEO. But he's got some problems. And I wonder if one person, one CEO can take care of all of this, which is, as you mentioned, the loss of a third place identity across 35,000 stores and also not great worker morale.

What do you think about that? Yeah. Well, first I want to remind folks, you know, this sounds terrible. And I'm a Brian Nicol fan. I'll say that. But realize this is a different situation than Chipotle. When Brian Nicol was appointed Chipotle 2017, I think, it was met with derision. They're hiring the guy from Taco Bell to come in and lead the company whose famous tagline

is Food with Integrity. It was met with very, very healthy skepticism. With Starbucks, as you say, 18% one day pop, he's met with, oh, he's the savior. So that's a very different setup. And I think investors should realize that and realize it's probably going to take a little bit of time for that to come back. I don't even count Laxman and I. He was the wrong guy.

And that's not a sin, right? I mean, again, I lay that right at the feet of Howard Schultz, actually. He was the wrong guy to lead this company. But I think under Kevin Johnson, who was there from 2017 to 2022, and then he left and Howard came back for his third-cent CEO, the company kind of became a capital returns guy. It kind of became almost a financial engineering or a financial returns company. And that can be death for a company with a specific culture. You've already mentioned GE.

I'm going to throw out a lot of the problems of Intel is facing today is because two, decades ago, they went from an innovative culture and Intel inside. We are a technology company first and foremost. They were one of the four horsemen, and that's a compliment by the way, one of the four horsemen of the tech bubble, you know, them, Cisco, Microsoft, and Qualcomm. I mean, that covered tech at the time. And Intel is today considerably lower than the high price it hit almost 25 years ago during the tech bubble. So, you know, when you stop focusing on what you are and start focusing on just dividends and buybacks and capital returns. I love those things, but those have to be the secondary thing that's coming from the business.

We're going to talk about a company that I think still has it in the proper order in a minute. But I want to see Nickel return to let's make it the third place identity. That's not to set out two little two person chairs to get people out as fast as possible. And this is going to maybe be controversial with some people. Stop focusing on unionized stores. Just stop focusing. Some stores unionize, like stop picking fights in that area. You know, if some stores unionized, that's fine. If some stores don't. I am from a background in industry. In my engineering days, there was a lot of industry. And we proudly were a non-union shop because we talked about very frequently when other industrial companies in our area, where I live, would talk about

unionizing or when we would talk about unionizing, we're like, hey, we're going to pay you what the union shop gets down the street. We're going to pay you the same as them. Oh, and you don't have to pay union dues. Problem solved. So, you know, a little rapprochement with your employees and 35,000 stores, maybe think if you need 35,000 stores today, maybe you can cut back on a few of the outlets. You don't have to have a Starbucks in the washroom of another Starbucks. Maybe think about strategically reducing the store count so you can later grow the store count. Basically, focus on what the Starbucks promise has been prior to Howard Schultz's return. Probably I would say Howard Schultz was there from 08 to 2017 after kicking Jim Donald out. He then passed

the reins to Kevin Johnson. Kind of that 08, 2010, 2012, kind of focus on what you were doing well there and try to replicate it. We'll see if it happens. Certainly a company I'm keeping a closer eye on now. Let's move to a company we've talked about a little bit on the show, which reported this morning, Academy Sports and Outdoors. You've pitched it and it's basically a value conscious Dix sporting goods. The major theme here is that sales for the company are slowing and decreasing in fact, but

the cash flow number is up by 60% year on year. I know you're a cash flow guy. What's happening with those cash flow numbers, Jim Gilli? Very good, thanks. I will say this was a, I'm going to make a bold and probably stupid prediction. I think the bottom's in on this stock, because that earnings report was terrible. You know, if you, as you go down, and look, it was largely expected to be terrible. Okay, I will say that. And I have, I have said, you know, said very much the same thing. But, you know, when you have quarterly, you know, sales are down 2.2, comp sales are down almost seven.

Net income is down about 9%. Earnings for share is only down about 3%. That's the result of past buybacks. We're going to get back to that. If you look more at the first half of the year, things are down even worse, except for the top line sales. They reduced their guidance. Guidance went from sales growth and growth.

Can't pronounce syllables, apparently. Sales growth was originally expected to be negative 1.5 to 3% this year with COMS, negative 4. to one. Now, comps are expected negative 6 to negative 3. They've reduced their free cash flow expectations a little bit. That's mainly due to decreased capital spending. This was a terrible quarter. It was a really bad quarter except for those cash flows as you talk about. And the stock is up as I speak about 6%. So the stock is up after just a brutal quarter, which suggests to me that everyone was expecting things to be bad. I was certainly expecting things to be bad. However, I have a bit of a longer-term view on this one, and I have a case study where I think

this one is tracking. I think we can focus on why things are bad management highlighting. We had hurricanes. We have a tightened consumer. I think it's also worth pointing out when you look at this company next to Dick Sporting Goods, Dick Sporting Goods had comp sales growth of four and a half percent. Academy Sports had a 7 percent comp sales decline. They're still opening stores. So before we get to the case study, like what's happening with that disconnect, you think? I think it's a better, it's a better viewed brand. Dix is a better viewed brand. Dix has a far more reach in terms of their branding. I believe they're in all 50 states or at least the 48 continental states, Whereas I think Academy might be in 19 states now.

I think they just reopened a store in Ohio for the first time. So they're doing a lot of, they're doing a lot of Greenfields research, which, you know, as you point out, with negative comps, might not be the best, might not be the best application of it for now. But I think there's increasing brand awareness. I think there's a lot more brand stickiness with Dix and I think you need to see Academy doing, that increasing brand awareness. Now, they have done this move before. They have chased this. And this is a company that, as you say, they talked about having issues in the quarter from hurricane hits,

which knocked off, I believe, about $16 million off sales. They had issues with conversion of a distribution center or warehouse, where they had a bit of a hit because they chalked up to about $30 or $35 million in lost sales. So, there's $50 million in lost sales from this quarter that, you know, they at least have an explanation for. Whether you buy the explanation or not is up to you. But they were very good on the conference call as well, just talking about, you know, this didn't work, this wasn't great. We are seeing some green shoots. Green shoots being, they're talking about more recently open stores or outperforming. The legacy stores are doing well. What little we have on 2023 vintage stores.

Yeah, those are outperforming 2022 stores, which are just now entering the earliest stores in 2022 are just starting to enter the comp sales. You calculate your comps. You don't use all stores because a story opened last week. We're not going to include that in comp sales. So I think things are going to turn. It might suggest to you, it might suggest to you that some of their legacy stores might need a bit of a refresh if the newer stores are indeed.

outperforming to that level. When I look at the overall business going on here, and I look at what they're talking about, like this is a company that had a, that famously had a five-year plan that went from like 2018 to 2022. They hit all the targets in that five-year plan ahead of schedule. They've now got a second five-year plan that is running through 2027, where they talk about sale. They want to get sales over 10 billion total. They want a net income margin about 10 percent, adjusted operating. profit, 13%. They want to increase their inventory turns, yada, yada. They want to increase their digital sales. And when I look at that and give it a very, very healthy haircut, like, I'm

trying to be very, very pessimistic with my forecasting on this company. Because, you know, if they outperform my pessimistic estimates, I think we're all going to do very, very well, frankly, in this one. And I am a shareholder. After the numbers they've reported, after the very, shall we say, negative numbers I expect for the next year, year in a bit. Modeling all of this out, and particularly what they do with their cash flow, because the cash flow story is very good here. What do they do with that cash flow? They're doing all of their gross spending on new stores.

That is all covered by self-generated cash. They pay a very modest dividend, but it's still there. It's still something. And they buy back a lot of stock, and they're very aggressive at buying back their shares at today's prices. And I will suggest you, the reason they're doing it at today's prices is because very, very modest sales growth conversion of, you know, so-called gap profitability. So your Ibit or adjusted Ibit, pick your poison there to cash flow, to free cash flow.

I assume it's going to take a hit. Like for example, over the last four quarters, adjusted operating profit to to free cash flow has been converted at about a 60% rate. I don't have it any higher than 49% rate going forward. Historically, it's been well over 100 if you do cumulative. I run through my modeling exercise. I try to be very pessimistic. I make sure I account for all of the debt they've got. I make sure I account for all of the options and other shares and things that are outstanding that are going to be a drag on value for shareholders. And I'm struggling, Ricky, to get the fair value, the intrinsic value of this company below $80.

of my estimate. And the stock's trading at about 55 or 56 today, I think. So, frankly, at this point, the fact that they're buying back shares as aggressively as they are, while not impacting their growth, their growth plans, they're not borrowing to buy back stock. Like, they do have some debt, but they've got almost as much cash as they have debt. I think they've been about $150 million differential. They've been slowly taking their debt down. There's a lot of really good stuff happening here under the hood. And I'm going to keep on pound of the table because I don't see any reason. Even with this bad quarter, which was expected, I don't see anything that's derailing my long-term thesis here. And this is very undervalued in my view. Well, I'm a shareholder as well.

And I know we talk about this company a lot. I hope it's undervalued. Jim Gillies, we do not have time for the Ticketmaster story. Hope we get to it another time. I appreciate your time and your insight on this. No problem. Thank you. These days I'm all about quality over quantity, especially in my closet. If it's not well-made and versatile, it's just not worth it. That's honestly what I love Quince. The fabrics feel elevated, the cuts are thoughtful, and the pricing actually makes sense. Quince makes high-quality wardrobe staples using premium fabrics like 100% European linen, silk and organic cotton poplin.

They work directly with safe ethical factories and cut off the middlemen, so you aren't paying for brand markups or fancy stores, just quality clothing. Everything they make is built to hold up season. after season and is consistently rated 4.5 to 5 stars by thousands of real people like me who wear their clothes every day. The Quince, Mongolian cashmere crewneck sweater may be the most comfortable one that I own. It's light, soft, and it was a lot more affordable than you think quality cashmere would be. Stop waiting to build the wardrobe you actually want. Right now, go to quince.com slash Motley for free shipping and 365-day returns. That's a full year to wear it

and love it. And you will. Now available in Canada, too. Don't keep settling for that don't last. Go to QINCE.com slash Motley for free shipping and 365-day returns. Quince.com slash Motley. All right, up next. As many as 272 million social security numbers are out on the dark web after a background check company was hacked. So what can you do to protect your information? My colleague Robert Brokamp caught up with Dave Hatter, a cybersecurity consultant for interest IT and a regular on 55 KRC VT. station in a two-part interview. We're playing part one today, part two tomorrow. Also, as a heads up for newer listeners, BroCamp's nickname at The Fool is Bro. So you'll hear Dave call him that

throughout the conversation. Last month, we learned that National Public Data, which is a data broker, had been hacked. And the personal information of hundreds of millions of Americans began showing up on the so-called dark web. So, Dave, what do we know about how this happened and what types of data were stolen? Well, bro, thanks for having me on first off. Yeah, this is a lot of This is a major breach, probably based on what we've seen so far, one of the most, if not the most significant, because it appears to be the culmination of a bunch of different data sets put together. It's billions of records, hundreds of millions of people, primarily in the U.S., the U.K., and Canada, it appears so far. But it's got a lot of really sensitive data in it

that potentially is very valuable to hackers and identity thieves. And that's really part of the problem. Until we have a national privacy law, which we don't, there's roughly 18 states that have one now, you as a consumer continue to be the unfortunate victim of these things. There's usually, even if they pay a fine, very nominal penalties to these companies, these data brokers, again, whose entire existence is built on absorbing your data, compiling your data, aggregating your data, and selling it to other people where they make gigantic amounts of money. And when you see these breaches, again, you as the consumer are now and the one that's fraught with peril. You're the one that has to worry about, you know, is your identity going to be stolen or your bank account's going to be

hacked? It's a major problem. It's a major problem. them, unfortunately. And again, when you look at the types of sensitive data, this has, even though it doesn't all appear to be correct, it's things like social security numbers and passwords. The stuff that makes it really valuable to bad guys who want to steal your money. And the thing I try to get across to people all the time who say, well, too small, I don't have anything we're stealing. Your money's worth stealing. They will steal it if you make it easy for them. And sadly, this is just like rocket fuel for them. Yeah, unfortunately, this isn't the first data breach right back in 2017, a breach at Equifax, one of the major credit ratings agencies affected more of that. and 147 million consumers, and this won't be the last. So let's talk about the steps people should take to protect their identity, their credit score, and their accounts. Your first recommendation is to not ignore a data breach notification. Yeah, you know, generally speaking, once these companies step up and acknowledge that this has happened, the national public data has, you'll end up getting some kind of letter from them. Sadly, I've gotten several of these. Chances are you have too, and I'm sure all your listeners have from various data breaches that have occurred,

like the one you mentioned previously. When you get these letters, you need to open them, you need to read them carefully. You need to understand what they're telling you has potentially been stolen because not all data is equal to the bad guys. Having a social security number is a lot more valuable than having your street address. Having a password, and, bro, they know people use the same passwords on multiple accounts. That's why tinfoil hat nerds like me are always warning.

You've got to get a password manager. You need to have a strong, unique password in every account. They know people use the same password or some slight variation like, hey, I'm going to be super secure on this account. I'm going to make it one, two, three, four, five, six, seven, right? They know this. Okay. So when they get this kind of data, it's super valuable to them. Again, not all data is equal.

Read the notification, understand what it says. And then the rest of these steps you can apply in different orders depending on what kind of data was stolen. But in this particular case, again, it's a lot of super sensitive data. You really need to act on this. And reading about this breach, I had read about some websites that supposedly you could go to that website, enter your information, and see if your information was stolen. But my first reaction was like, I don't want to go to these websites and enter my information. They were npdbreech.com and npd.pd.pentester.com. So do you think people should go and use those sites?

In general, no. Let me say this. You know, there are legitimate sites out there like, have I been poned, which is created by Troy Hunt, a Microsoft guy, where you can go and search the dark web. and see if your information shows up. So the concept itself is legitimate, but the bad guys know people don't really understand how this works, and they will often set up fraudulent sites to prompt you. I mean, think of it like a honeypot for bad guys, right? Hey, you can come check and see if your data's been stolen. So while, again, the concept itself is legitimate, I would strongly encourage people to not use any of these sites to pop up unless, A, it's mentioned in the data breach notification letter you get from the company that informs you with a breach, or B, it's been well vetted by someone like a

consumer reports or a CNet or a ZDNet or someone like that, right? There are organizations out there that have experts and editors that will look into this sort of stuff. Again, if the FTC, for example, or the FBI on their public website say, use this site to see if your data has been breached, okay, I would trust that, but I certainly would not trust any emails. I would not trust anything I stumble into. I would only use a tool like that. if it was thoroughly vetted or presented to me through a legitimate source, like in a data breach letter. Another one of your top recommendations is to freeze your credit. Yeah, honestly, bro, I don't know why people don't do this in general.

I just keep my credit frozen. You know, the minor inconvenience of having to unfreeze it when I need to perform some sort of credit-related activity, you know, it just makes it so much more difficult for bad guys to go down the identity theft route. Now, again, with the kind of data that's been stolen, there's all kinds of data. different ways they might try to scam you. But in this particular case, because it contained things like Social Security numbers and other sensitive information that would make it be easy to impersonate you, I would strongly recommend, as have many experts since this have come out, just go ahead, go into the credit bureaus, freeze your credit. Again, it's painless for the most part. It takes a little time.

And then if you need to go get a loan for a car or whatever, unfreeze your credit, do what you need to do, refreeze it. I think it's just good advice in general. But if you get the data breach notification letter, it would be one of the first things I would do. Yeah, and those three agencies are Experian, Equifax TransUnion, you go to the websites, you sign up, you freeze it. It'll take you 15 to 20 minutes total to do it. And then if you ever need to unfreeze it, it can be unfrozen in as little as an hour if you just do it on the website or you call it. It's pretty trivial compared to the protection you get as a result. Another recommendation is to initiate a fraud alert with the credit Bureau's, maybe while you're there on the website? While this will make it a little more painful,

potentially once you've done this, especially if your data has shown up in one of these breaches, to your point, bro, yeah, just go in there while you're freezing your credit, initiate a fraud alert, it'll stay for a year, it'll roll across all three credit unions. It just makes it that much more difficult for the bad guys who are trying to impersonate you and open credit in your name for them to take that action. And again, it's fairly easy to do. Once it's in place, you're going to be a much more difficult target. And that's really the thing folks need to get in their head. Yes, I know, I'm too, I said this before, I am too small. I don't have anything worth stealing. Why would someone target me? Your money's worth stealing. Sometimes the way they get to that is through identity theft.

And thankfully, while I've never been the victim of identity theft, I know several people that have, and I can tell you, it can be extremely traumatic, painful, and time-consuming and costly to unwind identity theft. By so by, so by is what I'm trying to say. So by doing these simple things, again, you're going to make yourself a much more difficult target. And in most cases, they're just going to move on to the softer targets who aren't implementing these protections. Another type of information that people can get is maybe your credit card information or your bank account information. So you suggest that people should stay alert and monitor their financial accounts for unusual activity. This is good advice in general as well, because a lot of times,

if they do get their hands on that, they'll run a couple small transactions to see a if you're paying attention. And then if those go through, you know, they'll swing for the fences. If, though, you get that data notification letter, then, you know, you should be on heightened alert. You should be extremely vigilant. You should monitor your accounts. And hopefully you're going to do some of the other things we're about to talk about here. But, you know, once you've shown up in one of these breaches, whether it's this breach or like the recent AT&T data breach or any of the others, again, I've gotten several letters from different organizations over the last three or four years telling me my data's been stolen. Once you get one of those, you should be on heightened alert because there's no guarantee they're going to target you.

But there is a guarantee. They have information that would make it easy for them to target you, whether it's identity theft or trying to get into your bank accounts or some other sort of impersonation where they're going to attempt to social engineer you into doing something and steal your money. People have likely seen commercials for identity theft monitoring services. What do you think of those? Well, in general, I've had a lot of people push back when I say I think this is a good, idea. You know, if you're super disciplined and you have a lot of time on your hands, can you monitor all your accounts and look for fraudulent activity and so forth? Yeah, you can. So you can't do it at scale like their advanced AI platforms can, but you can do some of these things on your

own. The big benefit, though, of identity theft monitoring companies, in my opinion is, A, they can operate at scale that no human being can. You know, none of it's perfect, none of it's a guarantee you're going to be protected. But B, in most cases, as part of of your subscription to their service, they have experts and attorneys who can help you. You know, once you are the victim of identity theft, again, speaking from people I know that this has happened to, it was extremely difficult for them to recover from that, very costly, very painful. I mean, almost like they have PTSD afterwards because it can be so hard to undo the damage that's been done. Again, if you're staying vigilant, if you're freezing your credit,

if you have some sort of identity theft monitoring service and they detect that, hopefully they're going to be able to stop it very quickly. And then even if they can't, you can rely on their attorneys for advice and guidance on what to do next to try to recover from that with the least amount of pain. So in my opinion, it's worth it. But even more importantly, in so many of these cases, once these data breach notification letters go out, that's why it's so important to read it, they're going to offer a year or two years of free identity theft monitoring. It's absolutely crazy not to sign up for that free service and take advantage of it and let them do their thing. Again, you're trying to build defense in depth, multiple layers of protections so that ultimately,

if they don't get stopped at one level, they get stopped at the next level. And then if there is a successful attack of some sort, you've got experts there that can help you try to recover. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Malvey. Thanks for listening. We'll be back tomorrow. Thank you.