Cramer rips Starbucks downgrade, argues for why investors should stay in the struggling stock

CNBC

7 days ago

Jim Cramer on Thursday blasted a Wall Street downgrade of Starbucks that warned the coffee giant's turnaround could take longer than expected and weigh on earnings. Jim didn't mince his words when defending Starbucks CEO Brian Niccol's ability to claw the coffee giant out of declining sales, operational issues and a negative perception of the brand. "A bet against Brian Niccol, what am I going to send you? An invitation to your funeral," Jim said on CNBC, reprising a common phrase he's used over the years when disagreeing with an analyst call. Niccol, the former Chipotle chief, has been in his new role leading Starbucks for roughly nine months. Niccol's tall task: Reinvigorating the iconic coffee brand in its core North American market, while resuscitating its business in the long-term growth market of China, which has struggled amid fierce local competition. TD Cowen, however, is skeptical that it can be done on a reasonable timeline — while still delivering the kind of profits that investors want to see. The firm downgraded Starbucks to hold from buy and maintained its price target of $90 per share. Starbucks shares fell around 2% Thursday to roughly $84 per share following the downgrade. Year to date, the stock is down 7%. Starbucks is "settling into a new base of earnings that differs from consensus," analysts wrote in their note to clients. A key reason why, they argued, is Niccol's labor investments into its stores, which may limit the company's earnings power. Starbucks' weaker-than-expected earnings report in late April earnings report showed a steep year-over-year contraction in operating margin, due in part to additional labor to support Niccol's "Back to Starbucks" strategy. Niccol argues that well-staffed stores, with less employee turnover, are necessary to deliver a great customer experience and ensure that long wait times do not deter would-be customers. In particular, Starbucks is aiming to serve customers their drinks in four minutes or less, and Niccol said on the April earnings call that early returns from staffing pilot programs are promising. SBUX YTD mountain SBUX stock performance. Nevertheless, backing its cautious stance, TD Cowen cited proprietary survey data showing "deteriorating value perceptions" and "narrowing quality perceptions for Starbucks relative to peers." The firm warned that this is leading to reduced traffic from customers who were visiting at least weekly. These data points inform TD Cowen's view that Starbucks' same-store sales recovery in North America in the coming years will not progress as fast as Wall Street currently expects. Now layer in the higher labor expenses, and analysts believe that Starbucks will struggle to meet expectations on earnings growth in the 2026 to 2028 timeframe. Despite the headwinds, Jim remains optimistic. He pointed to Niccol's track record as a "foremost turnaround artist," crediting him for rescuing Chipotle from a deep reputational crisis tied to food safety concerns. Right now, Jim argued Niccol is in the thick of doing that at the American coffee chain, though he acknowledged Starbucks is facing a different set of challenges than Chipotle. There are some relevant lessons, though. As it relates to the balancing act between investment and profitability, Jim sees Niccol striking it prudently just as he did as Chipotle CEO. "Brian Niccol understood the labor problems when he took over at Chipotle and he dealt with them very effectively. There's no reason he can't do that here," Jim said on Thursday's Morning Meeting. Jim acknowledged that turnarounds take time and rarely unfold perfectly, but he cautioned against trying to time the market. He doesn't want to play the trading game of trying to exit the stock due to fears it will go lower because there's no guarantee of being able to get back in before the rally takes hold. Instead, Jim prefers to stay long Starbucks awhile awaiting additional progress on the turnaround. (Jim Cramer's Charitable Trust is long SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.