Starbucks' Strategic Continuity Likely as CEO Retires

Wide-moat Starbucks (SBUX) has navigated a flurry of changes over the past two years, dealing with COVID-19-induced restrictions, a swiftly evolving labor and supply chain environment, and a store footprint reimagination in the United States and Canada. With CEO Kevin Johnson announcing his retirement effective April 4, we add a leadership transition to that list. Founder and former CEO Howard Schultz will take the reins in the interim; the board of directors anticipates identifying a long-term replacement by this fall. We expect strategic continuity and maintain our $106 fair value estimate and Exemplary capital allocation rating.

Johnson was Schultz's hand-picked successor after the latter stepped away from his second stint as CEO in 2017. Johnson's record at Microsoft and Juniper Networks positioned him well to lead Starbucks' digital renaissance. During his tenure, the coffee chain initiated its "stars for everyone" initiative, effectively democratizing its loyalty program, and embraced artificial intelligence-driven initiatives like Deep Brew, unlocking operational efficiencies and driving more strategic menu development. With loyalty program members now representing more than 50% of domestic spending at the chain, and with domestic same-store sales growth of 17.6% against the comparable period in 2019 (prepandemic) despite meaningful pressure in the specialty cafe segment (with sales still 7%-8% below prepandemic levels), those investments look particularly prescient in hindsight.

Starbucks' incoming CEO will have plenty on their plate, with sharp increases in commodity and labor costs figuring to pressure operating margins through at least the next two years. While still small (less than 1.5% of U.S. company-owned stores have called for a vote), the organized labor movement also figures to attract management attention, while periodic operating disruptions in China add another degree of execution risk.