You hate it when a shibboleth that was supposed to exercise and demand discipline actually costs you money. That’s how I feel about the idea that it’s a sin to give up value. Since the late ’80s, I’ve believed that if you think a company or its brand is valuable, you have to fight to “keep it in the bank,” which is real Wall Street talk for holding on to the stock. But lately it’s been a bear market for my Charitable Trust, the portfolio we use for Investing Club, and I’d apologize, but it’s worked for so long I don’t know what to apologize for. Consider the case of the now-former Club holding Wynn Resorts. The casino chain was a strong performing stock for years when Steve Wynn ran it. But it’s become an unmitigated disaster because every company with China exposure has been terrible, no matter how good it was. We didn’t give up on Danaher despite the life sciences company’s China business. We thought it was too valuable. The same goes for GE Healthcare, although I’m kicking myself for not recognizing its interest rate sensitivity and that if I wanted a medical device maker that valued science, I should have just bought Intuitive Surgical. But Wynn Resorts has been stubborn, and its valuation has plummeted on many levels from price-earnings to enterprise value to EBITDA. It trades as if the casinos are off-limits to people in China. Nothing matters; it has to go down. We finally sold Wynn Resorts on August 5 to raise money to buy higher-quality stocks. Nothing was worse than club holding Estee Lauder, which reports its latest earnings report on Monday before the market closes. I’ve owned this stock for years for the trust and watched longtime CEO Fabrizio Freda navigate the cosmetics industry globally. He seemed to have it all figured out — everything except something that sounds a lot like a cultural revolution. Of course, you could argue that the stock has no value. Even after this huge drop, the stock isn’t recovering. The collapse of its China business has made it an extremely expensive growth stock that is unlikely to hit its numbers. And its 2.78% dividend yield doesn’t protect it. Unfortunately, this is a disaster of the first order, and we’ve stayed invested because Freda, who has been CEO since July 2009, has been able to create value before. Now he’s clearly unable to. That’s why Estée Lauder shares rose 6.6% on Tuesday, the day club holding company Starbucks announced that Laxman Narasimhan is stepping down as CEO and Brian Niccol, the reliable CEO of Chipotle, will take the top job next month. I like Freda, but to say he excelled here would be to be a janitor of the board. I’m not. I can’t believe how unprepared he was by the changes in China. I’m sure that if you speak critically in this business, the CEO in question blatantly sees you as a fool who knows nothing, just like anyone else, in the same way that a critic can’t speak unless they’re playing professionally. I don’t buy that; I’m sure now that you need a fresh perspective. But it’s a family business, which further complicates the situation and could make change more difficult. Why not shut the company down? We cut some jobs at the end of July. Now we’re just hoping that there actually is a change in leadership, and if we stick with it, we won’t have to kick ourselves for what happened with Starbucks. And what exactly happened? Last night, my wife Lisa and I went with my “Squawk on the Street” co-host Carl Quintanilla to a lovely fundraiser for the Sag Harbor Cinema, a nonprofit gem that makes the small Long Island town a destination beyond a pretty harbor and some excellent restaurants. Everyone was incredibly nice, as they always are when the cause is good and true. At one point, a great gentleman from the news industry came up to me and congratulated me on firing Narasimhan, referring to my May 1 interview with the manager after the coffee chain’s disastrous quarterly results. I quickly corrected him by saying that Narasimhan was responsible, because his answers sounded like some kind of lecture, and he was repeating the same ideas he’d been using since the fall, even though it was so clear that they weren’t working. I can tell you that I didn’t expect what I got when he appeared on “Squawk on the Street” that day. I expected contrition; we got none. I expected an admission that the turnaround wasn’t working; stupid me, didn’t I know that? I wanted a plan that addressed the need for a cheap latte; actually, there was no need. I wanted to discuss the idea that there are just too many new drinks on the menu; it was out of the question, even if my daughter, a former barista, was confused by a tenth of the choices and pretended to be the one who smeared designer hearts on the top layer of the latte. Suffice it to say, the “Fugitive”-esque train wreck could have been avoided at any point. But the Rubicon was crossed about the second minute of the horror show. So it was pretty natural that activist investors like Elliott Management would show up—as I wrote in May, they could—because Starbucks is a phenomenal brand and, fragile as it may seem, people still love it. I wasn’t privy to what happened, and don’t pretend to know how much of a role three-time CEO and founder Howard Schultz played. I know he was rightly angry to see performance disintegrate under Narasimhan. It’s the third time Schultz, who remains a major shareholder, has been unhappy with his successor. But the numbers justified a change. My colleague David Faber asked me the other day what I thought Niccol could do at Starbucks. I was superficial and just said something like, “Fix the problem.” The truth, though, is that Niccol is a problem solver. He knows food. He knows service. He knows the most important quality of this type of business is order throughput. He’s battle-tested. He’s incredibly qualified, and he’ll get the job done. Should the stock really have jumped 24.5% after Tuesday’s announcement? It’s a big change, and he’s a successful executive. More importantly, the market had lost all confidence in Narasimhan and didn’t like his consultant-like behavior. Among the questions going forward: Can Niccol work with the continued presence of Schultz, who now comes across as someone who won’t let go? Does Starbucks’ board know that there’s no one better than Niccol, so if it doesn’t work out at first, it won’t be easy to oust him? But here’s the good news: There’s a way to fix this. Ron Shaich, the man who built Panera Bread into an institution before stepping down as CEO in 2010, saw the company beginning to falter. In his excellent autobiography, he recounts how he returned to the company – first as co-CEO, then as sole CEO – to spur growth and modernize operations for the digital age. He knew it would be very hard. He knew the chain was in an existential crisis. So he set up “Panera 2.0,” which included a few test stores in Charlotte, North Carolina, where he could tinker with what was needed. It took forever. A year later, I begged him to come on “Mad Money” to talk to me about the outcome; he said they weren’t ready yet. It took more than a year, but when Panera 2.0 was ready, it took the country by storm. If Niccol does it that way, I’m convinced the stock will look cheap today. Was Narasimhan that bad? No, Niccol is that good. Narasimhan didn’t have the restaurant skills needed. He came from the packaged food business, which was only a small part of the job. Dish soap and coffee? Who came up with that? To be fair to Narasimhan, he had to deal with a boycott of Starbucks by pro-Palestinian supporters. That was tough. The fact that the company stood up against any violence is noble. Most importantly, it seems like there was nothing Narasimhan could have done and it really hurt sales. But the fact is that sales were falling anyway as stores struggled with throughput and some customers complained about prices. Here’s an interesting question: What exactly is Starbucks’ value? Right now, not a single flattering word is being said about the store. I’d say that’s its value, in a way. The bar is so low, the situation so dire, that Niccol has the best cover in the world. He can tinker around and make meaningful changes anywhere in the world. He can strategize in case there’s another boycott. He can read the labor force, like he did at Chipotle. He knows throughput better than anyone in the world. Read his recent conference calls. He’s the maestro. A lot of things had to go right to get that stock back to $90 a share. You had to have no hesitation and a clean break with Narasimhan. You had to find the best guy in the business and be sure he would even take the job, given the history of people who have tried to run the company regardless of his legacy. You needed activists to focus the board’s attention. You needed belief that the company can be saved and that Niccol is the right person to do it. All of those boxes were checked. That makes me want to keep owning it. But in the end, this was a highly unusual set of circumstances that won’t be easily replicated at Estee Lauder or Wynn. I’m not excited about it. But at Starbucks? Let’s just say that for the first time since we bought the company, just before Narasimhan was named the new CEO, I can actually breathe a sigh of relief. (Jim Cramer’s Charitable Trust is long SBUX and EL. A full list of stocks can be found here.) As a subscriber to 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 from his Charitable Trust’s portfolio. If Jim has spoken about a stock on television, he will wait 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION MENTIONED ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY AND OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR DUTY EXISTS OR IS CREATED BY RECEIVING INFORMATION RELATED TO THE INVESTING CLUB. NO PARTICULAR RESULT OR PROFIT IS GUARANTEED.
A Starbucks branch in Manhattan, New York City, on July 16, 2024.
Beata Zawrzel | Photo only | Getty Images
You hate it when a shibboleth that is supposed to enforce and enforce discipline actually costs you money. That’s how I feel about the idea that it’s a sin to give up value. Since the late 1980s, I’ve believed that if you think a company or its brand is valuable, you have to fight to “keep it in the bank,” as Wall Street puts it, to hold on to the stock.
