Few executives are as closely associated with their brand as Howard Schultz is with Starbucks (SBUX), so it's not surprising that the announcement that he intends to step down as executive chairman and a member of the board raises questions about the company's leadership and strategic vision. However, while Schultz's influence in building Starbucks' industry leadership and a wide moat can't be replaced, we believe investors should still feel confident about the company's longer-term prospects. First, we still consider Starbucks to have one of the deepest benches in the consumer industry--including but not limited to COO Roz Brewer, Group President of International and Channel Development John Culver, and Starbucks China CEO Belinda Wong--and believe this move will help them step out of Schultz's shadow and accelerate key initiatives such as revitalizing U.S. comps, executing China growth plans, and expanding the company's CPG footprint. Second, Mike Ullman--who will replace Howard Schulz as chairman and has served on Starbucks board since 2003--brings extensive retail leadership through his various roles at JC Penney, LVMH, DFS Group, and Macy's, which could be an asset in stabilizing U.S. sales trends. Last, if Schultz does pursue a public service role--a possibility he conceded in a letter sent to Starbucks partners in conjunction with the announcement--we believe a separation from the company will help to avoid any potential conflicts of interest.
We're not planning any changes to our $68 fair value estimate or our Exemplary stewardship rating. While we recognize investor frustration with U.S. comp trends and still believe they will take time to stabilize, we believe the combination of China's leadership, new channel diversification opportunities, and capital allocation ($20 billion expected to be returned to shareholders between 2018 and 2020) offers several reasons to stay with this name.
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R.J. Hottovy, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.