Stock price soared by 24%, investment bank upgraded its rating... Changing captains in times of crisis, is Starbucks really welcoming a "heaven-sent hunk"?

According to Zhitong Finance, on Tuesday, Starbucks appointed Brian Niccol as the new CEO and chairman, replacing Laxman Narasimhan. Wall Street believes that Niccol is the right choice to turn around Starbucks and lead the chain out of the era of its founder Howard Schultz. Starbucks has reported a decline in same-store sales over the past two quarters, with its U.S. business facing challenges. Piper Sandler, TD Cowen, and Baird have all raised their stock ratings for Starbucks following the leadership change.

Investors believe he can revitalize the company. Following the news, Starbucks' stock rose by 24.5% on Tuesday, potentially marking its best single-day performance since its IPO in 1992. Niccol was the former CEO of Chipotle (CMG.US). Meanwhile, due to shareholders' regret over losing the long-serving CEO, Chipotle's stock price fell by 7.5%.

TD Cowen analyst Andrew Charles emphasized the importance of this combined role in a report to clients, stating, "In our view, Starbucks has hired a Hall of Fame restaurant industry CEO who has been appointed as CEO and chairman of Starbucks, indicating a new era is on the horizon."

Other analysts have praised Niccol, believing he is the right choice to address Starbucks' sales slump. A challenging consumer environment, deteriorating customer experience, and increased competition from small coffee shops have recently hurt the chain's performance.

Oppenheimer analyst Brian Bittner said, "We believe he is the ideal candidate for Starbucks, as we believe no one is more capable than him to reexamine Starbucks' operations, competitive positioning, and overall strategy."

The end of an era?

Niccol's appointment may also signal the end of Schultz's significant influence on Starbucks. Schultz transformed Starbucks into a global coffee giant. Schultz served as CEO from 1986 to 2000, 2008 to 2017, and 2022 to 2023, stepping in twice to save the company during sales slumps. His last return raised concerns about the company's succession plan.

Evercore ISI analyst David Palmer wrote, "Importantly, Niccol may be the only restaurant executive capable of addressing the 'hanging' issue of Howard Schultz, the founder."

As his final term came to an end, he vowed not to return as CEO, although his presence still looms large over the company. In May of this year, after Starbucks experienced a tough quarter, he wrote an open letter on LinkedIn detailing the challenges the company faced and offering advice to company leaders - without mentioning Narasimhan by name.

Morgan Stanley analyst Brian Harbour wrote in a report on Tuesday that even after Schultz's retirement, his involvement in the company remains "a question mark hanging over the company's stock." On Tuesday, as part of the leadership restructuring at Starbucks, Mellody Hobson resigned as the Chairman of Starbucks and became the Chief Independent Director. She mentioned that she had discussions with Schultz and kept him informed of the situation despite him no longer holding a formal position within the company.

Schultz remains a major shareholder of Starbucks, holding approximately 2% of the shares. Schultz expressed support for the hiring of Nocella during the press conference announcing the personnel changes. The honorary chairman stated in a release that he believes Nocella is the leader the company needs at a "pivotal moment" in its history.

Some analysts speculate that with the experienced restaurant CEO Nocella taking the helm, Schultz may eventually step back completely. Nocella will also succeed Hobson as the board chairman, giving him more room for reform. Gordon Haskett analyst Don Bilson wrote, "This will be the last time investors care what he has to say, as Nocella is now at the helm."

Nocella has previous experience taking over a brand led by its founder and making it his own. When he joined Chipotle in 2018, he succeeded founder Steve Ells who had been leading the chain since 1993. Bernstein analyst Danilo Gargiulo wrote in a report that Nocella moved the headquarters of the Mexican burrito chain from Denver to Newport Beach to attract different talents - perhaps to further develop the brand from its founder-led state.

Facing Challenges

While most analysts welcome Nocella's appointment, some are more cautious, pointing out that Starbucks is a much larger and more complex enterprise compared to Chipotle.

BTIG analyst Peter Saleh wrote, "Starbucks' operating model is much more complex than Chipotle's, with company-operated stores and licensed stores, both domestically and internationally, with a significant presence in China as well."

Unlike Chipotle, which has almost no licensed stores except for some airport locations and a relatively smaller international business, Nocella has been working to expand its business outside the U.S. in recent years. On the other hand, Starbucks has more international stores than in the U.S. While investors have been focusing on the chain's performance domestically, Starbucks is still struggling in its second-largest market - China.

Narasinhan mentioned in the company's recent earnings call that he is exploring "strategic partnership relationships" for its China business, which could include joint ventures, technology partnerships, or other options. Nocella's appointment may indicate Starbucks abandoning this exploration, although he does have experience in business separations from his time as the head of Taco Bell under Yum Brands. During his tenure, Yum Brands spun off its China business into Yum China Although the demand for Mexican burritos at Moe's BBQ remains high, consumers' concerns about the economy have dampened their demand for coffee. The reality may prove to be a bigger obstacle for Nicole than investors expected. Wedbush analyst Nick Setyan said, "His challenge is to connect with new customers. Besides being able to change the direction of macro headwinds, we believe that shareholders' optimism (as demonstrated by this morning's stock price performance) is premature."