Key Points:

• Starbucks struggles with high prices and competition, even under new leadership.
• The new CEO faces challenges and progress is expected to be slow.
• Concerns over the CEO’s decision to work from California, not Seattle.
• Also: While Starbucks lets down investors, “the Next Nvidia” is gearing up to make them rich.

Douglas and Lee discuss their disdain for Starbucks (NASDAQ: SBUX), particularly criticizing its former CEO, Howard Schultz, for his poor leadership and questionable management decisions. They highlight the challenges facing Starbucks, such as high prices, increased competition, and a troubled expansion into China. Despite a recent stock jump due to the appointment of a new CEO from Chipotle, they express skepticism about his ability to turn the company around quickly, given the deep-rooted issues. They also raise concerns about the new CEO’s decision to base his office in Newport Beach instead of Seattle, which they see as a red flag. The conversation ends with plans to revisit Starbucks’ performance after the holiday quarter, which will be the new CEO’s first full quarter in charge.

Transcript:

So companies I love to hate.

I hated Starbucks.

No, I know you did.

Starbucks, you know, it was badly run.

I don’t like Howard Schultz, who was the semi-founder and was the CEO three times.

He hated labor.

He was just a nasty person.

Just a nasty guy.

Always pretended he was going to run for president, brought in a new guy.

This guy is the great, this guy is going to take us to the promised land.

They just dumped him.

I mean, this guy was handpicked by Howard, right?

And then he was groomed by Howard.

You have to remember he was CEO and waiting while he went and worked in a bunch of stores.

So they decided that the best guy here is they get the guy from Chipotle because Chipotle is arguably the most successful of the big, big fast food chains.

It’s been astonishing.

It really has.

So the stock jumps more than 20%.

Yep.

Here’s my problem.

If you look at what troubles Starbucks, it cannot be solved by bringing in a new CEO, period.

Number one, the food and drinks are too expensive.

The only solution to changing that is dropping all those prices and killing margins.

So if you say your biggest problem is the cost of what you sell the public, that is not a problem that can be solved.

As a matter of fact, if you look at things like dairy, coffee, the prices of some of these things are going to keep going up.

Just because inflation isn’t here doesn’t mean you don’t have, you know, component inflation.

Right.

The only idea, remember, none of the Starbucks food or anything, none of that’s actually made there.

It all just comes in and they warm it up.

On the back of a truck.

Yeah, I don’t think he’s going to be able to pull off.

And again, the masterful work at Chipotle aside, because it has become just the absolute millennial go-to place.

You’re not going to get an argument about how.

What I’m saying, though, is he’s now moving to a company that is deeply troubled.

Now, to me, this is their biggest problem.

They thought that they were going to be the leading coffee shop in China.

And everybody says, well, China is the place to be.

Everybody says this.

Walmart used to say it.

GM used to say it.

You want to be in China.

It’s the largest market in the world.

It’s got four times as many people as the United States.

Well, guess what?

There’s a coffee company, a coffee shop company in China called Luckin.

And their number of stores are twice the number of Starbucks stores.

So if you think you’re going to fix…

And they tend to sell stuff for less money than when Starbucks does a sort of comparable coffee or a meal.

And so it’s not like Starbucks US, where they are the coffee company.

China, which they used to say was their future, they’re now in a market…

They’ve got a huge competitor.

Competitor has double their stores.

And how are you going to fix that?

Well, you know, it’s interesting how clearly there was a massive short squeeze because given that, you know, Elliott management got what they wanted.

And, you know, even though I read that they weren’t even told that they were going to make this switch until after it happened.

So it’s like, okay, so you get a big short squeeze, which probably was 10% or half of that move, half, you know, 50% of that 24% move.

Maybe more.

But again, you’re not going to turn this around overnight.

This is going to be a long process and they’re probably going to have to A, close stores or maybe face a Walgreens sort of, you know, situation where they have too many.

And how is he going to turn this around quick?

Well, he’s not going to turn it around quick, which means, you know, he’s coming in and what you and I would describe as sort of the middle of a quarter.

That means that the next quarter, the quarter he announces his first quarter as CEO is going to be bad.

Same store sales are going to be bad, revenue and EPS are going to be bad.

That leaves him another quarter of the year to sort of see if he can fix it a tiny amount.

If they announce that the last quarter of this calendar year was weak, his first full quarter as CEO…

The stock’s going to go right back down to where it was before the announcement.

And it’s just they’re going to slog.

They’ll be just going on quarter after quarter.

And he won’t be quite as shiny and bright as he is right now.

Hardly.

Well, and again, the one thing, the one, you know, kind of tailwind he will have is that, you know, it’ll be the holiday quarter.

And they probably sell more crap, you know, small gifts and things like that when people are grabbing their coffee because somebody goes, oh, here’s a Starbucks gift.

I’m not going to disagree with you.

But remember, he’s running against that same quarter last year when they had all the fun shit.

Right, right, right.

But it could be.

I guess my point is it could be better than the current quarter.

But yes, if you said to me, will it be better?

The answer is yes.

Will it be better than the previous quarter year over year?

I’m not sure.

But it almost has to be because if he can’t show that, you know, he’s done something, then the market knows that this is a long, long process and the jump, the bump it just got because of him…

It’s going to go away.

And if people are disappointed enough, it’s going to go below where it was trading.

Well, and you know, it’s interesting because we have to talk about Sergeant Schultz every single time.

He’s still kind of a chairman emeritus.

He can still attend board meetings.

He can still have some input.

So, you know, he’ll be there.

And, you know, I don’t know if that’s good, bad, or indifferent, but, you know, if you have somebody kind of breathing over your shoulder, I don’t know.

It’ll be interesting to see how that plays out.

Well, I don’t know what he got the board to tell him about, Howard, but they must have made some pretty big promise because this guy’s seen a whole bunch of people, you know, Howard push him out.

So right, right.

The promise made, we just don’t know what it was.

And the pay package is huge.

I mean, all in, it’s like $120 million.

Now, I rented that stock and, you know, all this other stuff.

But yeah, two things I’ve rarely seen.

You got the equivalent of $100 million signing bonus, right?

That a lot of its stock appreciation is right.

Yeah, it’s a lot.

The other thing is, is that his headquarters will not be in Seattle, where he is located in California.

They’re going to open an office in Newport Beach just for him.

Where his house is.

And if there was anything that alarmed me, it wasn’t the pay package.

The minute that the guy coming in says he’s not going to have his headquarters where all the other people are who run the company.

Maybe I’m wrong.

Tell me I’m crazy.

But I don’t like that.

Well, he said he would commute.

But yeah, I mean, don’t you have to be right there, you know, with your C-suite overlords constantly, you know, trying to look at the analytics from every week, every month, every, you know, every sector, every region and trying to get a bid on what you can do to improve the business.

That’s the answer.

So you and I will get together.

I don’t think that the next quarter, his first quarter as CEO, which he won’t have been, but he’ll announce it…

I don’t think that quarter means anything, but then we’ll talk about it.

But the quarter we have to get back and really talk about this is when they announced the last calendar quarter of the year.

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