The restaurant industry was abuzz last week with the surprise announcement that star CEO Brian Niccol was leaving the burrito world for a taste of coffee. He steered Chipotle Mexican Grill (CMG -0.12%) out of a marketing disaster when he took the helm in 2018, and the stock gained more than 950% from the time he took over through to its stock split this June.
Starbucks (SBUX -0.26%) investors are hoping that he can bring some fresh brew to their cups as well. The announcement itself sent Starbucks stock soaring, adding $20 billion to its market cap.
Is it time for investors to bet on a Starbucks recovery, or should you stick with Chipotle Mexican Grill?
The case for Starbucks: Can't keep up with demand
Starbucks has been drowning in problems, but many of its woes stem from drowning in too much demand without processes to keep up. That's why the company's problems look fixable. It needs to figure out how to get beverages that can be customized 170,000 ways to customers who are tired of waiting in long lines and paying too much.
Total revenue was roughly flat in the 2024 fiscal third quarter (ended June 30), but there are some negative metrics underlying that. Global comparable sales decreased 3% from last year, and comparable transactions declined 5%. That was even worse in North America at 6%. Part of that was mitigated by price increases, but customers might be at their price-increase limit.
The China situation looks precarious. Management has mentioned the opportunities in China as one of its main growth drivers over the past few years, but right now, China is a lag on the overall business. Comparable sales decreased 14% from last year in China in Q3, split evenly between transactions and ticket.
Starbucks is still expanding at a rapid pace, with 526 store openings in the quarter, making the company's total nearly 40,000. Some of these new stores in urban areas ease congestion, with several order-and-pickup-only stores, and a focus on drive-thru and digital in newer locations. Management has mentioned several ways it's trying to turn around, such as getting better equipment for baristas to fulfill orders faster and innovating with new drinks to make Starbucks the exciting option.
There's been a public spat between founder and former CEO Howard Schultz and his hand-picked successor over the past few weeks about how the company is handling its troubles, and new positions by two equity firms brought some urgency to the situation.
Enter Niccol. Starbucks' board had secretly sought the vaunted CEO, and he'll be starting in less than a month. He has several turnarounds to his credit and is known as a top restaurant CEO. His success at Chipotle is mainly about process, and if he can bring that magic to Starbucks, investors believe it can only move higher.
The case for Chipotle: More than its CEO
Chipotle stock fell after the announcement, which is understandable. Niccol leaves some large shoes to fill. But the company has an excellent model that's delivered for shareholders for years now, and it doesn't need a new CEO to make any big changes. In the meantime, longtime CFO Jack Hartung, who was set to leave next year, will stay on indefinitely in a different capacity to help with the transition.
There isn't really any reason to worry about Chipotle, which has demonstrated incredible resilience despite inflation and economic volatility since the beginning of the pandemic. The company is reliable for revenue and same-store sales growth and robust profitability, and it's planning to double its North American store count. It's also recently started to focus on international expansion, which could be an entirely new growth driver.
Chipotle reported phenomenal results in the second quarter, with sales up 18.2% year over year driven by an 11% increase in same-store sales. Operating margin widened from 17.9% to 19.2%, and unlike Starbucks, Chipotle's price increases have been successfully accepted.
Which restaurant stock is the better buy?
Last week, I would have said that Chipotle stock comes with little risk. That's still true, but a huge management change like this comes with some elevated risk. Even after falling, Chipotle stock is expensive, trading at 51 times trailing 12-month earnings. That's a premium valuation, which doesn't offer lots of room to make mistakes. The company doesn't really make mistakes, which is why it's earned this valuation.
Starbucks, conversely, trades at a price-to-earnings (P/E) ratio of 27 since its price shot up. That is no longer dirt cheap, but it's still half of Chipotle's. There's reason to be confident about Starbucks. It's still a giant of a company, with an enviable brand, and millions of loyal customers. That's what's there to build with, and Niccol's appointment inspires confidence. But there's much more risk here.
Investors looking for a more reliable pick can still feel comfortable choosing Chipotle stock. If you have more of an appetite for risk, you might want to invest in Starbucks stock right now.
