It wasn't the numbers that cooked shares of Starbucks after hours last night. Not that Starbucks didn't turn in a "disappointing" (their words) quarter last night. They did. But the stock was hanging in there just fine well into last night's call. China comps were flat(!), The US was weak but not a disaster and the rest of the world comped positively. Margins were a trainwreck. EPS wasn't even close to estimates, but Starbucks pulled guidance over 6mo ago. No one owned Starbucks for last night's EPS.
What killed $SBUX (or at least sent shares from flat to down ~8%) was Starbucks shifting spending plans from machinery to labor. Under prior management, Starbucks was somewhat obsessed with rolling out Machines and Food, committing to spending $450 million on machinery starting in 2022. Say goodbye to the cold brew systems and elaborate food prep systems. Only heavy-traffic drive-thru-based stores were getting the elaborate coffee-making systems.
Niccol, who seemed confident if a little disdainful of prior initiatives he's now having to unwind, is young(er) blood but old school. He's spending on employees. Not throwing money at them but absolutely spending more on labor. The idea is to make the Starbucks in-store experience less like going to a Methadone clinic and more like going to a comfortable, efficient store with fewer surly workers.
Wall Street immediately expressed a strong preference for Starbucks spending on machines and not people:
Niccol refused to blame economic uncertainty for Starbucks' current woes. He wouldn't complain about China. CFO Cathy Smith dismissed the global trade war out of hand at the top of the call. They source from 28 different countries. It'll be fine. Starbucks' biggest concern was the merchandise sold in stores being made in China. Smith assured investors it would find a supplier of mugs by Christmas.
Starbucks' comps were similar to those of Chipotle, where Brian Niccol was CEO before getting lured to SBUX. Chipotle had negative SSS for the first time since the Pandemic and blamed the entire miss on cautious consumers starting in February. CMG rallied. SBUX is getting boot-stomped.
Over the long haul give me a CEO who takes accountability for everything and celebrates the team. Over the short term, Starbucks would have been far better off paying $450 million to install hardware no one wanted and cutting staff.
