Well, the news is official. Brian Nickel, that guy right
there is the new Starbucks CEO. As of September 9th, he's
leaving Chipotle. Now, Brian Nickel, this guy is
by far the best food CEO living today.
He has the best track record. In fact, it's so good that the
reaction to this move from leaving Chipotle to go to
Starbucks cause Starbucks stock to go up.
Currently 20 percent, 20% is one of the biggest days in Starbucks
history. That's over 18, $1,000,000 in
market cap for the company. So obviously Starbucks investors
are excited as they should be, and Chipotle investors are not
feeling good today. They're not feeling quite as
good as Chipotle. Stock is down 10% on the same
news that they're losing Brian Nickel.
Now obviously there's a lot to dive into here.
What is Brian Nickel actually worth?
What does his track record actually look like?
What did he do for Chipotle to turn the company around from?
When he was at Chipotle the stock went U / 700%.
But what can it mean for Starbucks?
Starbucks faces a lot of unique challenges with China, same
store sales growth in the US, we have the caffeine bubble,
multiple competitors moving into Starbucks territory.
Can Brian Nichol take on this challenge and is Starbucks a
buy? Today?
We're going to be diving into all of it.
I'll be giving you an overview of what Brian Nicholas done for
Chipotle, what he's likely to do for Starbucks, the type of
things I'd look for as a Starbucks investor, and where
this also leaves Chipotle now that the stock is down over 30%
in the past couple of months. So we have a lot to get to on
this main story. Plus we have some other news
stories as well. We just had Home Depot's
earnings report today. It wasn't great.
They expect sales to weaken even more.
But there is hope for Home Depot.
Interest rates look like they're going down in the future.
Does that mean it's time to buy this stock?
And then finally, I've seen over and over again this type of
headline Intel stock may have bottom at the tangible book
value. There's other viral tweets
pointing out the same thing. The patient investor says that
Intel literally is trading at liquidation value.
That's the tangible book value. Another tweet from Richard Jark
this time says that this is crazy.
Intel is so hated by the market right now that it is now trading
at tangible book value. Tangible book value is normally
what shareholders get if the company goes bankrupt.
These make for popular viral tweets.
But I'll be explaining why tangible book value is not an
indicator of whether or not to buy a stock.
So obviously, this is going to be a jam packed episode.
We have a lot of news to get into.
Let's go ahead and jump into this main story that Starbucks
is replacing their CEO Laxman Nersenhum with Chipotle CEO
Brian Nickel. Now, why is this happening?
Well, first of all, this is the tale of two food companies.
Starbucks is a company that has been struggling for well over a
year. The company same store sales in
the US have been in the decline for seven consecutive quarters.
In fact, the most recent quarter, Starbucks had one of
the worst earnings report I've ever seen.
You could look it up. Every single metric, every KPI,
everything that you can look for went in the wrong direction.
Negative sales in China, negative sales in the US, same
store sales decline, the app usage declining, the amount of
new store openings declining, average unit volume declining.
Everything was going down. It was one of the worst reports
again, that I've ever seen. Then you contrast that with
Chipotle. Chipotle has been so expertly
ran and executed that it has outperformed basically every
other food company aside from a few Wingstop.
But Chipotle has been one of the top performers.
The same store sales have increased consecutively for
years. In fact, they continue to climb
even as the most recent quarter. As every other food company has
fallen off, Chipotle seems like one-of-a-kind.
It just continues to grow. No matter the environment, no
matter pushback from consumers, no matter online viral
campaigns, Chipotle continues to execute and the stock has
followed. It's been an incredible
performing stock. I used to own it.
I recently just sold it a month ago.
Chipotle went up so fast, so quickly over the past year that
I had so much gains in such a short amount of time.
I decided to take my gains and run away.
I made around $11,000 on that stock.
So you see the difference here. Chipotle is in a situation where
everything seems to be going about as good as it can.
There's some minor complaints about portion sizes.
That's minor stuff. The numbers show the true story.
Chipotle is executing with extreme precision.
The company has been well managed and Starbucks's
execution at the same time has been miserable.
And Starbucks shareholders are sick of it.
Now, it's one thing to have poor performance from a company
financially. Sometimes companies go through
difficult times. Sometimes there's some
cyclicality in the business. But it's another thing to have
ACEO that you're not confident in.
And the big thing that got this Starbucks CEO fired and replaced
with Brian Nickel is the interview following last
quarter's report. They released all these terrible
metrics showing everything was moving in the wrong direction.
And then you call upon the CEO to come and explain it, to give
some context, to give some hope and some clarity into what's
going on. And this was the interview that
got the CEO fired. It was this moment, the worst
part of the interview that I believe contributed to it the
most. Let's go ahead and just look at
this. We have Jim Cramer here, and he
is grilling, skewering the CEO over these poor metrics.
And he points out that the CEO is not really being transparent.
He's not saying this is a terrible quarter and we're going
to fix it. He's trying to put on a happy
face and pretend like things are better than they are.
So let's go ahead and just watch this as Jim Cramer calls out the
CEO. You said it's not business as
usual. And I want to make a point here,
Sir. You are still expanding as if it
is business as usual. You add, for instance, on the
quarter, you talk about opening stores in Honduras and Ecuador.
Is it not time to pause, Sir, and figure out what's really
going wrong and spend a deep dive and making it so that this
decline in comp store numbers does not continue because it is
perilous to the actual existential existence of
Starbucks? That is an excellent question
from Jim Cramer. Why would they continue to
expand all across the world when they're having consecutive
decline in sales in the US? They obviously have some
existential problem in the US and they're acting like they
don't. They're just expanding
everywhere. You want to figure out your
business and what's wrong with it before you expand.
So Jim here is asking excellent questions and listen to the
answer he gives here. If you look at the US business
and look at the fundamentals of the US business, we are holding
share in the US We are still the largest player in out of home
coffee if you look at some of the metrics that we have.
Tim Horton said you are not holding share, Sir.
I regard them as being Seminole companies that are just as good
when it comes to quote McDonald's says you are losing
share. I can't go against those three
companies. They are too good and too honest
and too big for me to dismiss. He says right there that they're
holding share within the US and that is just blatantly not true.
If you look at the share count as the amount of coffee like
drinks being sold, it's abundantly clear that Starbucks
is losing share. There's companies like Dutch
Bros growing in that category. There's lots of alternatives to
coffee growing in that category. Even look at Celsius.
A lot of people view Celsius as a cheaper version of Starbucks.
It's not entirely in the same exact bracket, but their share
loss being had by multiple other competitors, including Tim
horton's, including McDonald's, including other companies
offering the same product. So the CEO here is directly
called out for being misleading, saying that they're keeping
share within the US, which they're clearly not.
And other companies are saying that they're gaining share
against Starbucks. And this is what creates a
feeling in Starbucks shareholders as being helpless.
When the company's going down and you don't have confidence in
the company's leadership. You feel entirely helpless, like
you need someone else to step in and get things under control.
Now you may think that that interview was bad enough, but
the Starbucks CEO just a month ago went on another interview
where he openly states that he doesn't work beyond 6:00 PM.
If there's anything after 6:00 PM and if I'm in town, it's got
to be a pretty high bar to keep me away from the family.
Anybody who gets a minute of time off of that better be sure
that it's important. Now let me remind you, this is a
guy that's being paid upwards of $28 million to run the company,
a massive international company, and his attitude is that he
won't work a minute after 6:00 PM.
That's the attitude of an entry level employee that wants to go
home and play Xbox after work. In fact, many entry level
employees, many low skilled labor, right?
The ones that are just getting trained new work beyond their
mandatory shift to make sure things are running well.
They might be shutting down a Starbucks restaurant and it may
go a little bit longer than expected.
They can't just instantly clock out and leave whenever they
want. He has a worse attitude with
this interview than most of the employees working at his
company. So Starbucks shareholders were
in a situation where they had no confidence in the leadership and
the company was headed in the wrong direction.
And this is what caused a lot of activist investors to step in.
We had Trion Partners, we had Elliot step in and put pressure
on Starbucks. We don't know all the backroom
discussions, but we know that they're trying to invoke change,
and change they did. The new CEO of Starbucks as of
September 9th is Brian Nickel. Now, to give context of what
Brian Nickel may be able to do for Starbucks, I think it's good
to take a little review of what he's done for Chipotle.
Let's go ahead and just take a look at some of the things he's
accomplished over his six years at this company.
If we look at Chipotle here, we can take a look at some of the
key metrics of the company. We can look at the trailing 12
months of revenue for Chipotle. He joined Q1 of 2018.
So right here, Chipotle was making $4.56 billion in annual
revenue. 4.56 The revenue has climbed to 10.66 and it's
climbed basically every single quarter over that time period.
In fact, I would say it's every quarter because the only
quarters it went down, literally the only ones was COVID.
That was it. It went down 1/4 and then
quickly went back to its normal trend.
So for all intents and purposes, if you rule out the impacts of
COVID, he grew revenue every single quarter consistently
during his tenure of this company.
We can look at the free cash flow of the company.
The free cash flow is even more incredible.
Look at this on a trailing 12 month basis.
In Q1 of 2018, it was doing $300 million in free cash flow.
Now he used that money in free cash flow to do heavy CapEx
investments to expand the amount of restaurants.
So even though it didn't immediately grow, the company's
earnings power was growing every single quarter since he took
over. And then once they got to scale,
the free cash flow really kicked in.
Look at this massive free cash flow growth since 2020.
We see the company growing like crazy as their new store counts
and efficiencies kick in. He grew the free cash flow to
now generating $1.3 billion per year.
So from 300 million to 1.3 billion. 2018 the earnings per
share were $0.13. That's for the entire year.
Now it's a dollar heat out seven X the earnings per share in Q1
of 2018. Chipotle at 2400 locations.
Current day they have 3500, so we added on over 1000 locations
to the company. Now more impressive than just
doing that, adding more and more locations is growing the amount
of volume each location is doing at the same time.
And Q1 of 2018, Chipotle was doing just under $2,000,000 in
revenue per location. It had a streak of losing
revenue per location. So he entered into the company
with declining revenue per location and then immediately
the quarter after he joined, it started to trend upwards and it
trended upwards every single quarter except for COVID.
That was the only time period where it went down and only a
little bit. It resumed its normal trajectory
of going up every single quarter.
This is the same store sales growth that you want to see.
When Brian Nickel joined Chipotle, the stock price was
under $7.00 per share. Now the stock price is above
$50.00 and it's down $5 today on the news that he's leaving.
So he's basically leaving with the stock price at $55 if you
don't account for the sell off because he's leaving.
So from under $7.00 to $55. Now, on top of all of these
fundamental changes, which definitively prove that Chipotle
is in a much better space today than it was when he first
joined, there's also a lot of qualities, a lot of things that
don't show up in the numbers, like Brian Nickel making
Chipotle one of the most present companies.
It's in the in crowd, it's on social media, it's memed, it's
it's part of the in culture. That's something difficult to
accomplish. Making it so that your company
is something that other people want to go to.
They want to eat at Chipotle because it's the cool thing to
do. He accomplished that through the
marketing and the focus on social media.
He also grew a little bit of a culture with Chipotle.
Working at quick service restaurants is difficult.
It's not a fun job to do, but he made it a lot better for the
employees, creating a consistent culture across the board.
He also grew the digital app to 50 million users and made it so
that roughly half the orders that Chipotle receives come from
digital ordering. It was also under Brian Nickel
that he came up with the Chipotle Lane.
The idea of a drive through that's not technically a drive
through. This makes it so you don't have
a big billboard, you don't order with the speaker, there's no
legislation against it. It's just a drive through where
you can order with your app and pick it up.
So there's no line. This is all stuff that happened
under Brian Nickel. And of course, it's caused this
excellent outcome in Chipotle stock.
So obviously, there is valid reason for investors in Chipotle
to be disappointed at his departure and for investors in
Starbucks to be excited about him coming on.
Now, if we look at how the stocks are reacting, Chipotle's
currently down 10%. And to me that makes sense.
When you have ACEO that good with that good of a track record
that really knows a company that's running it well and they
leave, it's just not a good feeling.
Investors don't feel as excited about the stock.
And frankly, there's nobody else in the industry with the track
record of Brian Nickel. He's the best.
So it's difficult to conceive of a situation where they bring on
a better CEO. They may have ACEO that ends up
doing as well, but they will be less proven and it's going to be
difficult for CEO to come in and bring Chipotle stock up when
it's already so high. Brian Nickel is timing this move
perfectly. He's leaving his company at the
very top. Everything's going about as
perfect as it can. The stock is trading currently
at a 55 Ford PE ratio, so he's leaving at the absolute top of
Chipotle, the best situation possible, and moving into
Starbucks when things are messy. That's a really good change for
Brian Nickel, but that leaves Chipotle investors in a more
difficult situation. You can ask any Chipotle
investor today and they're not going to be excited about this
news. Not a single one of them.
Starbucks investors, on the other hand, should not just be
enthused at the stock price is up, but they should be enthused
at the CEO is so good that they have a new leader of the company
that's competent. A lot of people may say, well,
the CEO is good, but is he worth 20%?
Is it really justified to have it go up 20%?
I don't believe that, Brian Nicholas, the only reason that
Starbucks is up 20%. Part of the reason is that
Starbucks is current CEO. Laxman is leaving, so Starbucks
investors feel like they're getting rid of a problem and
getting a better solution. Laxman is out as of today.
His firing was immediate even though the new CEO Brian
Nicholas coming on September 9th.
Starbucks CEO is out today. So he's gone and Starbucks
investors are not only excited at his departure, but they're
also excited at Brian Nichol coming on.
The combination of which is a 20% bump.
A lot of people may question what value ACEO brings to a
company like this, but keep in mind Starbucks is not a very
simple company to run. It's not one that you can just
switch on to autopilot and it virtually runs itself.
It's not a Visa and a MasterCard.
It's not an S&P Global. Those companies are far more
self running. Starbucks is a company that
needs good leadership. It needs good judgement.
Having the leverage of employees and capital and revenues and
cash flow relying on the judgement of one person makes
that judgement incredibly valuable.
And with the CEO that has a demonstrated history of good
judgement, it's worth paying up for.
I think the move today is justified.
I think the stock should move up dramatically because of Brian
Nichols demonstrated history of good judgement.
Good judgement is worth paying for when you have a company like
Starbucks that is reliant on good judgement to run.
Now, having said that, even with his great judgement, Brian
Nichols going to face unique challenges operating Starbucks,
ones that did not exist when he was operating Chipotle.
I view Chipotle as a far more unique proposition.
Having a unique burrito company that's large and scaled with the
digital app presence is simply one-of-a-kind.
There's not any other company at scale doing that.
Chipotle is the only one, whereas Starbucks faces far more
competitors that are similar to it than Chipotle does.
Another unique attribute of Starbucks compared to Chipotle
is Starbucks is huge in China, Thousands, 10s of thousands of
restaurants in China where Chipotle has no exposure to
China. So Brian Nichols going to have
to deal with some unique challenges here, and I think
this is what he'll end up doing with Starbucks.
The first thing I think he's going to do is improve
efficiencies of the company. This is a huge focus of him in
Chipotle. By improving efficiencies, I
mean improving throughput. Throughput is the name that
these fast food companies give for basically making the line go
faster, just making the line move along faster so people
don't have to wait around for their food.
Brian Nickel made it so that when you go into Chipotle, you
get through the line quickly. You're not waiting in line for
10 or 20 minutes. Improving throughput is proven
to make it so that people will order more, they'll order more
frequently, They won't bail on a restaurant because of the long
line. So I think that's going to be a
major focus that he has for Starbucks.
The other thing that I think that Brian Nicholas likely to do
is to separate Starbucks China from the rest of Starbucks.
I think he will argue to the executive team, to the board,
that Starbucks in China is an entirely different thing to
manage. It's so different culturally,
the people there, the government, everything.
You have to take into account that it should be managed
separately as a separate division or company from the
rest of Starbucks. And by doing so, he can focus
his effort on the rest of Starbucks.
This has happened many times in the past.
I think there's a good chance he'll do this with Starbucks.
He's going to create more simplicity in the digital app
and focus on more people ordering digitally, improving
that process. And I also think he's going to
focus on getting back to Starbucks's roots.
He's a culture guy. He likes improving the culture
of the company. He'll recognize that Starbucks's
culture is about being the go to place to hang out, to plug in
your MacBook, to have a coffee, to sit down, to just pass some
time and have some drinks. He knows the culture of
Starbucks and he's going to make that a focus.
So overall, I'm very bullish on the changes that will be
implemented to Starbucks over time.
And I think that Brian Nicholas, the best thing this company can
hope for. Now, again, having said that,
when I look at Starbucks, I do view it as a very unique company
from Chipotle. I don't view these as
interchangeable. Chipotle is far more unique in
its value proposition to customers than Starbucks.
And I think ultimately the biggest challenge that Brian
Nichols going to face is the challenge inherent in
Starbucks's fundamentals, the competitive dynamics of the
industry. I've gone over this many times
in the past. I think there is a caffeine
bubble. I think there's too many
companies trying to sell too many highly caffeinated
beverages and doing so causes pricing power to be limited.
When pricing power is limited, same store sales decline and
that's what you're seeing with Starbucks.
The amount of large scale, powerful companies trying to
push highly caffeinated beverages is incredible.
You have Monster Energy Celsius. You have Pepsi with Rockstar.
You have Coca-Cola selling their new energy drinks, You have
McDonald's getting into energy drink, you have Dutch Bros.
The latest is Taco Bell. Every company is trying to get
into this category and when there's more and more direct
competitors to Starbucks, it makes pricing power more and
more difficult at the same time that the consumer slowing.
I still think this is going to be very difficult for Brian
Nickel. So even with Brian Nickel moving
on to Starbucks, for me personally, I still don't like
the competitive dynamics enough to buy into the company, but I
don't blame you for holding on to the stock if you are.
In terms of Chipotle right now, the stock is still very
expensive even after this drop in price.
It's trading back a little bit, but it's not falling enough for
me to buy back into this company.
It's nowhere close to where I first purchased into it and the
PE ratio is still very high above A50 PE ratio.
So right now Chipotle is still an expensive stock, but it lost
its great CEO. Now moving on, Home Depot
reported their earnings today. They reported a beat on the
earnings per share, but they also forecast weaken consumer
demand. The home improvement retailer
said it now expects full year comparable sales to decline by
three to 4%. And that is why the stock is
flat all year long because the sales of the company are flat.
Now, Home Depot's a stock that I haven't wanted to buy for well
over a year and that is because of interest rates.
Interest rates going up has a huge impact on any company
reliant on financing. Now, it's true that the items
you buy at Home Depot, you probably don't need financing
for specifically those items. But most people finance large
home improvement projects. So Home Depot and Lowe's, which
rely on large home improvement projects or contractor work,
rely on financing. With interest rates going up,
that means financing is more expensive.
Less people can afford it. The cost of capital goes up,
meaning that Home Depot all of a sudden has a less affluent
customer base. They can't afford the same
things they could afford previously.
So the stock of Home Depot and Lowe's has been flat for about a
year. I've also used the same reason
to sell out of any stock that had anything to do with
financing. And even though interest rates
are expected to go lower, I still don't see a lot of demand
being created for companies like Home Depot and Lowe's.
So I will not be buying into either of these companies.
Now finally we get to Intel. Intel has been an unmitigated
disaster this year, down 57% and the reports, the fundamentals,
everything looks the same. It is a disaster.
They're losing money every single quarter and the company's
losing market share as well. So the stock is down big this
year and it's down to a very low valuation.
Investors in IT may notice that the price to book this ratio
right here is normally high for different companies because
companies are worth more than their tangible assets.
They're worth more than just the factories.
They also have customers and they have cash flows.
So companies trade on a multiple of their price to book.
For example, if we look up Netflix here and we take a look
at the price to book of Netflix, it's at a 12.3, so it's 12 times
its price to book. That's a relatively normal
ratio. Some companies are higher, some
are lower depending on their physical assets.
But Intel is now priced at a point where it's trading below
its price to book and even it's priced a tangible book, meaning
even when you take out intangible assets, Intel is
still trading below that. This has caused a flurry of
headlines and tweets across social media with outlets like
Barron's reporting the Intel stock may have bottomed at
tangible book value. You have other super viral
tweets like the patient investor saying Intel literally trading
at liquidation value. You have Richard Jark saying
that this is crazy. Intel is so hated by the market,
it's now trading at tangible book value.
Tangible book value is normally what shareholders get if the
company goes bankrupt. These tweets have received
thousands of likes, millions of views.
In fact, there's so many people pointing this out how cheap
Intel is, that I'm afraid some people are going to use this as
a buy signal for the company. But investors should be well
aware that even though this makes for a good headline and a
good tweet, the truth is that a company trading below tangible
book value or tangible asset value does not mean it's a buy
signal, does not mean that the bottom is in for the company.
And in fact, you can disprove this entire thesis almost
immediately by bringing up this company right here.
Nikola. Nikola is currently trading
below tangible book value. It trades even cheaper than
Intel at a .775 price to book value.
It is continually traded below tangible book value as the stock
price has plummeted 70% year to date.
If it was a meaningful indicator that a company's trading below
tangible book value, it would also be a meaningful indicator
in the case of Nikola. But I don't see anyone citing
that Nikola is now bottomed or that Nikola is now cheap.
I only see that for Intel, and if I ask these investors to
point out why they didn't bring up the tangible book value
metric with Nikola, it's because they know Nikola is a bad
company, so it doesn't matter how cheap the company goes, it's
still a bad company destroying value every single day.
So the question is not whether or not a company's trading above
or below its tangible book value.
The question is whether or not the company's good or the
company's bad. In the case of Nikola, the
company's bad, so investors inherently know not to buy it,
even though it's trading at a cheap price with Intel.
That's the debate. If you think that Intel is a
good company that's going to create shareholder value in the
future, that's going to generate positive free cash flow and
decline share count and create free cash flow per share, then
the companies a buy. If you think Intel is a value
trap, a complex company with lots of difficulties that will
continue to struggle and lose market share, then you should
not buy it, even if it's trading below tangible book value.
In any case, I don't consider either of these companies all
that good, so I'm not going to be buying any of them.
That's all for this episode. If you enjoy this type of
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