SBUX IS NOT FIXED
SBUX is up 9% over the past month on China getting better, or is the US on a better path? I'll take the former.
Starbucks Corporation (SBUX) employees at 113 stores are striking on Thursday in what the union representing the workers called a “red cup rebellion.” The work stoppage at the scores of unionized shops comes on the chain’s “red cup day” promotion that offers customers a reusable red cup with the purchase of any holiday beverage. The promotion is viewed as a key sales driver for the company in the fourth quarter, particularly as this year’s event is the 25th anniversary. “This is the largest coordinated action of the Starbucks Union movement yet… and we’re just getting started,” the union tweeted, linking a map of striking locations. The union indicated the strike is meant to hit back at the Seattle-based coffee chain for its stifling of union activity. “Starbucks' (SBUX) anti-union campaign began in the summer of 2021 when Starbucks sent over 100 managers, executives, and corporate representatives to spy, threaten, and intimidate workers,” the union said leading up to the strike. “Since that time, Starbucks’ union-busting has only gotten worse.”
CMG
We are hosting a CMG call next Tuesday, November 22nd, @ 12:30 PM ET
I recently learned about this term called 'quiet quitting" from an article in Forbes where the CFO of CMG said it is his biggest economic concern. Quiet quitting is where you're not outright quitting your job but quitting the idea of going above and beyond. You're still performing your duties, but you're no longer subscribing to the hustle culture mentality that work has to be your life. Quiet quitting, in other words, is not really about quitting. It's more like a philosophy for doing the bare minimum at your job because your work environment can be unrewarding. The post-pandemic life for many workers in the restaurant industry has been so toxic it has become a productivity issue. For a fast-paced, high-achieving company like CMG, a slump in productivity can slow throughput, which is critical to the company's future success. To be clear, this is a cultural issue and not an employee problem.
Chipotle (CMG) Short Thesis:
- THROUGH THE LENS OF INCENTIVE COMP: In September 2018, we did a LONG Black Book where we praised management for the incentive comp structure as the best way to drive shareholder value - growing same-store sales and margins. Since 2018 same-store sales have grown 9.1% annually; restaurant-level margins have improved 530bps, and earnings have increased from $8.00 to $29.00. In 2022, the company raised prices aggressively, reaching 15% in 4Q22 to protect its incentive comp. Is management pushing the envelope too far on food and labor? Labor unrest is starting to build with the pressure to stop unionization and the economic reality of "Quiet Quitting." Concerns about food quality are also on the rise.
- CMG LABOR PROBLEMS: CMG has improved labor costs by 240bps since 2018, despite significant labor inflation; strong SSS growth (and price) over the same period has helped to leverage the fixed costs. While the company has seen significant labor leverage, investing in labor may be needed, as the CFO's most significant economic concern is "Quiet Quitting." Experts believe "Quiet Quitting" is about "bad bosses and not bad employees," therefore, it appears the CMG c-suite is to blame as they have not invested in its labor force. As the CFO said, "The labor market has been a challenge, as we all know, there's historically low unemployment, you've got this thing called quiet quitting. It's harder to keep young folks in a restaurant engaged in the current business." This issue is just one of many signals that CMG's excessive focus on growing margins by cutting and not investing in labor costs is hurting the business. The fix could be hundreds of BPS of labor margin pressure over the next few years.
- THE LTO TREADMILL: CMG's LTO's success can be attributed to the company's thoughtful "stage gate" process. That said, after five years and ten+ new products, that strategy is getting increasingly ineffective. The recent failure of the BOORITO LTO is the second example in a month of how CMG is now on the LTO treadmill. The price of the BOORITO LTO has gone up over the years; from Free in 2016 to $3 in 2017, $4 in 2019, and $5 for the online-only promotion in 2021, and now in 2022, it was $6. In the early days od\f the turnaround, the company led with what consumers were asking for; I don't believe consumers are telling the company they wanted Garlic Guajillo Steak on the menu. Or is it that food costs have declined 240bps since 2018, and the food quality is not as good?
PFGC
In 2022, PFGC will generate $298.5MM in CFO and spend $260MM cap ex, generating $38MM in FCF. Over the past two years, the company had bought back, on average, $21.4MM in stock. It could take ten years to buy back $300 million in stock.
On Wednesday, performance Food (PFGC) announced a four-year share repurchase program for up to $300M. The program will be funded with cash on hand, cash generated from operations, and borrowings under the firm's credit facility. The new program replaces the existing $250M buyback program. The program may be amended, suspended, or discontinued at any time.
