Wall Street Lunch: Starbucks Shocks With CEO Change

Summary:

• Chipotle CEO Brian Niccol to join Starbucks, replacing Laxman Narasimhan.
• PPI was up +0.1% M/M in July, Core PPI unchanged for the month.
• Home Depot’s Q2 results ahead of consensus estimates but full-year guidance below expectations.

Listen below or on the go on Apple Podcasts and Spotify.

Starbucks shares jumped as it named Brian Niccol as its new CEO. (0:16) Wholesale inflation comes in soft. (1:49) Traders get jitters about Hawaiian Holdings deal. (4:12)

This is an abridged transcript of the podcast.

Our top story so far. Starbucks (NASDAQ:SBUX) sent shockwaves across the restaurant sector with its announcement that it is replacing CEO Laxman Narasimhan with Chipotle Mexican Grill (CMG) CEO Brian Niccol.

Niccol joined Chipotle as CEO and a director in March 2018 and became Chairman of the Board in March 2020. Before joining Chipotle, he served as Chief Executive of Yum! Brands’ (YUM) Taco Bell.

Niccol will be on the new job almost immediately. Starbucks CFO Rachel Ruggeri will step in as interim chief executive until September 9, when Niccol officially takes over the top position.

Shares of Starbucks are soaring, and Wall Street applauded.

Evercore ISI analyst David Palmer sees the opportunity at Starbucks as primarily a U.S. brand issue with operations upside and digital and revenue management innovation.

He noted that at Chipotle, Niccol and his team have driven operational improvement, digital engagement, and improved innovation news.

“Importantly, Brian is likely the one restaurant executive that has the gravitas to address the Howard Schultz Founder overhang.”

Baird was even more positive, upgrading SBUX to an Outperform rating with a new price target of $110. Analyst David Tarantino and his team view Niccol as an exceptional executive based on his track record of driving strong results at Chipotle since he arrived in 2018, as well as his successful stints at Yum!

“We are confident that Niccol can leverage his brand management expertise and his broader leadership qualities to implement initiatives that will help to strengthen the fundamental performance of SBUX, particularly within the U.S. business (a key driver of sentiment for SBUX shares).”

On the economic front, the market cleared the first inflation hurdle, with wholesale prices coming in soft for July.

The PPI was up +0.1% M/M in July, less than the +0.2% expected and cooling from the 0.2% increase in June. That annual rate sank to 2.2%, well below the 2.6% forecast.

Core PPI, which excludes food and energy prices, was unchanged for the month, less than the +0.2% consensus. The annual core rate was 2.4%, vs. 3% expected.

Ian Shepardson, economist at Pantheon Macro, says the numbers “are good enough for the Fed to start easing in September. Admittedly, the unchanged reading on the core index was largely due to the 1.3% fall in the trade services component, which measures gross retail/wholesale margins, and reversed almost all of June’s 1.4% increase.”

“We provisionally estimate that the core PCE deflator increased by 0.15% in July, but only about one-third of the PCE components are derived from PPI data,” he added. “Our estimate is still based overwhelmingly on our forecast for the CPI numbers, released tomorrow.”

Odds for a Fed cut of 50 basis points in September rose to 55% from 50% after the report was released, a more modest rise than probably anticipated given the CPI on the horizon.

Among active stocks, Home Depot (HD) reported Q2 results ahead of consensus estimates but set full-year guidance below expectations. Comparable sales decreased -3.6% during the quarter, vs. -2.4% consensus. Customer transactions were down -1.8% during the quarter to $451 million.

Looking ahead, Home Depot expects comparable sales to decline about 3.0% to 4.0% in FY24, compared to a prior outlook for a decline of about 1%. The home improvement retailer expects to open around 12 new stores. Gross margin of approximately 33.5% is anticipated for the fiscal year, and operating margin of 13.5% to 13.6% vs. 14.1% prior estimate.

Sea Limited (SE), a Seeking Alpha subscriber favorite, saw its second-quarter revenue grow by about 23% year-over-year to $3.81 billion, beating estimates. The company, which operates the e-commerce platform Shopee, generated net income of $79.9 million, compared to $331M in the second quarter of 2023.

Hawaiian Holdings (HA) tumbled amid investor concern about a potential Justice Department lawsuit blocking its planned sale to Alaska Air (ALK).

A justice trial attorney who was involved in the DOJ’s lawsuit to block JetBlue (JBLU) from buying Spirit Airlines (SAVE) filed to practice in Hawaii. Brian Hanna, an attorney for the DOJ, notified the court, pursuant to the local rules of the U.S. District Court for the District of Hawaii, of his attention to appear before the U.S. to attend to the interests of the U.S., according to a legal filing from Monday being circulated among traders.

The legal filing didn’t mention Hawaiian Holdings or Alaska Air.

In other news of note, JetBlue (JBLU) remains under pressure after limping into Monday’s close with its largest loss on record. The company announced a $400 million debt offering to repay maturing bonds, triggering a credit downgrade at the Big Three rating agencies.

S&P cut its credit rating to B- from B on the carrier as the debt issuance along with a weaker-than-previously-expected forecast will “considerably weaken credit metrics, leading to funds from operations to debt remaining in the low-single-digit area through 2025.” It added that the carrier will remain free cash flow negative as a result of weaker operating cash generation and high capital spending needs.

Both S&P and Moody’s say the operating environment (excess capacity, high labor costs) will pressure earnings, with Moody’s adding that incremental debt related to the planned financing will cause the carrier’s debt/EBITDA to exceed 15x in 2024.

Moody’s said: “The downgrade of the corporate family rating (to B3 from B2) reflects our view that restoring operating profit and cash flow to levels that would lead to materially stronger credit metrics will require a number of years.

And in the Wall Street Research Corner, Bank of America on Tuesday published the results from its August global fund manager survey. A recession in the U.S. reclaimed its spot as the biggest tail risk for the market.

Among money managers, 39% cited a recession risk, up from 18% in July and topping geopolitical conflicts, cited by 25% of respondents. Still, while the hard landing crowd rose, the soft landing crowd rose at the expense of the no landing optimists.

Global growth expectations fell to an eight-month low, with 47% anticipating a weaker global economy in the next 12 months.

And 55% of fund managers said global monetary policy is too restrictive. That’s the highest level recorded since October 2008.

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