Brian Niccol has his arms around what’s been going wrong at Starbucks, says Jim Cramer

Key Concepts

• Turnaround Strategy: The process of revitalizing a struggling company.
• Direct-to-Consumer (DTC) Business Model: Selling products directly to customers, bypassing intermediaries.
• Brick-and-Mortar Distribution: Traditional retail store networks.
• Third Place Transformation: Creating spaces that are neither home nor work, fostering community and relaxation.
• Inventory Management: Controlling the amount of goods a company has on hand.
• Analyst Sentiment: The opinions and recommendations of financial analysts regarding a company's stock.

Starbucks Turnaround Under Brian Niccol

The transcript discusses the challenges and potential turnaround of Starbucks under its new CEO, Brian Niccol. Niccol, who previously led a successful turnaround at Chipotle, was appointed CEO of Starbucks when the stock was in the mid-70s. The news of his appointment initially boosted the stock by nearly 20 points, reaching $117 within seven months as confidence in his ability grew. However, the stock has since fallen back to $78 before a recent rise to $85.

The speaker, who knows Niccol and respects his work at Chipotle, notes that Niccol emphasized the time required for a turnaround, suggesting he may not have fully grasped the extent of the issues at Starbucks. The core problem identified is a reliance on reduced staffing and technology, which proved unsustainable for a fast-casual business. This approach, described as a "slippery slope that led to a crash," is now being blamed by some analysts for the stock's decline due to the slow pace of the turnaround.

The speaker argues that the decline is not due to Niccol "under-promising in order to overdeliver" but rather because the entire organization was in disarray. Niccol is now reportedly addressing the fundamental issues, recognizing that staffing, not technology, is the key. He also understands that some store layouts are not conducive to the "third place transformation" Starbucks aims for. The speaker views the current analyst sentiment turning against Niccol as a signal to buy, as analysts are getting "ahead of themselves" and failing to appreciate the time needed for a genuine turnaround.

Nike's Reinvention Under Eliot Hill

Similarly, the transcript addresses the situation at Nike, where former CEO Mark Parker is seen as having turned a strong company into an "also ran." The previous strategy focused on a direct-to-consumer (DTC) business model, leveraging technology. However, the speaker argues this approach has limitations, particularly for footwear, as shoes need to be tried on, and the DTC model is further complicated by issues like delivery theft.

Eliot Hill, described as a "Nike old hand," is tasked with reinventing the business. His proposed strategy involves:

1. Rebuilding the Brick-and-Mortar Distribution Network: This includes re-engaging with partners like Foot Locker and Dick's Sporting Goods.
2. Innovation and New Product Development: Hill needs to introduce new science and innovation, which the speaker believes were neglected under the previous regime. Simply reintroducing old shoe models is insufficient.
3. Addressing the China Market: This is identified as a significant challenge requiring a long-term solution.
4. Inventory Management: Existing inventory in the system is holding down earnings and needs to be cleared.
5. Management Alignment: Crucially, Hill needs to ensure that management and the rank-and-file are "rowing in the same direction," a task made easier by his prior positive relationships within the company.

Like Starbucks, Nike's stock has pulled back as analysts realize a rapid turnaround is improbable. The speaker reiterates that turnarounds are time-consuming and that the current moment of doubt for both Starbucks and Nike is precisely when one should be a buyer, not a seller.

Key Arguments and Perspectives

The central argument presented is that turnarounds for major companies like Starbucks and Nike are complex and time-consuming processes that are often misunderstood by the financial analyst community. Analysts tend to become overly optimistic early on, leading to disappointment and negative sentiment when immediate, dramatic results are not achieved. This creates buying opportunities for investors who understand the long-term nature of these transformations.

The speaker's perspective is one of contrarian investing, advocating for buying when others are selling, particularly during periods of doubt and negative analyst sentiment surrounding companies undergoing significant strategic shifts. The speaker's personal knowledge of Brian Niccol and Eliot Hill lends credibility to their belief in the CEOs' capabilities, despite the current challenges.

Data, Research Findings, and Statistics

• Starbucks Stock Movement:
  • Mid-70s: Stock price at the time of Brian Niccol's appointment.
  • Nearly 20-point jump: Initial stock increase upon the announcement.
  • $117: Peak stock price within seven months.
  • $78: Stock price before its recent run.
  • $85: Recent stock price.

Step-by-Step Processes and Methodologies

The transcript outlines implied methodologies for turnarounds, particularly for Niccol at Starbucks and Hill at Nike:

For Starbucks (Niccol):

1. Initial Assessment: Identify the core issues within the organization.
2. Root Cause Analysis: Determine the fundamental problems (e.g., over-reliance on technology, understaffing).
3. Strategic Realignment: Shift focus from technology to staffing.
4. Store Network Evaluation: Assess and potentially reconfigure store layouts for "third place transformation."
5. Long-Term Execution: Implement changes with an understanding that results will take time.

For Nike (Hill):

1. Strategic Re-evaluation: Move away from an over-reliance on DTC and technology for footwear.
2. Distribution Network Revitalization: Re-establish and strengthen brick-and-mortar partnerships.
3. Product Innovation: Develop new, advanced footwear designs.
4. Market-Specific Strategies: Address challenges in key markets like China.
5. Operational Efficiency: Manage and reduce existing inventory.
6. Cultural Alignment: Foster unity and shared direction within the company.

Notable Quotes and Significant Statements

• "But all that does is make me want to double down for my charitable trust." (Speaker's contrarian investment stance)
• "He emphasized endlessly that the turn would take time." (Brian Niccol on the expected duration of the Starbucks turnaround)
• "No, outside CEOs usually can't see into the organization. They don't recognize the rot." (Speaker on the challenges of diagnosing internal company problems)
• "What Brian ultimately found was that the whole Starbucks story was based on having fewer people working, and a reliance on technology to do the job done for any successful, fast casual performer. It was a slippery slope that led to a crash." (Speaker's diagnosis of Starbucks' core issues)
• "The turnarounds do take a lot of time." (Speaker's general observation on corporate turnarounds)
• "This is precisely the moment when people want to give up on Starbucks and on Nike. Which is why I want to be a buyer, not a seller." (Speaker's core investment thesis)

Logical Connections Between Sections

The transcript connects the situations at Starbucks and Nike through the overarching theme of turnaround challenges and analyst misinterpretations. Both companies are presented as facing significant strategic shifts, with new leadership tasked with revitalizing them. The speaker draws a parallel between the market's reaction to both companies: initial optimism followed by disappointment as the complexity and time required for a turnaround become apparent. This shared pattern leads to the speaker's consistent recommendation to buy both stocks at these moments of doubt.

Synthesis/Conclusion

The main takeaway is that investing in companies undergoing significant turnarounds requires patience and a contrarian mindset. The speaker argues that financial analysts often fail to appreciate the time and effort needed to fundamentally reshape large organizations like Starbucks and Nike. This leads to a cycle of over-optimism and subsequent pessimism, creating opportunities for investors who can look beyond short-term fluctuations and recognize the long-term potential under capable leadership. The speaker advocates for buying Starbucks and Nike at their current low points, believing that the market is overreacting to the slow pace of change and underestimating the eventual success of their respective CEOs, Brian Niccol and Eliot Hill.