BREAKINGVIEWS-Starbucks serves up broken windows theory of value

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to remove extraneous word in paragraph two.

By Jennifer Saba

NEW YORK, Jan 30 (Reuters Breakingviews) - There’s a clear message scribbled on Brian Niccol’s to-go cup: sweat the small stuff. The Starbucks SBUX.O chief executive has unveiled several demi-sized initiatives to help turn around the $122 billion coffee chain. Simple measures to improve stores are necessary. The company’s rich valuation, though, is priced for bigger things.

On Tuesday, Niccol unveiled results for his first full quarter at the helm since moving over from burrito chain Chipotle Mexican Grill CMG.N. The news was slightly less grim than feared: sales at stores in operation for at least 13 months fell 4% from the same period a year prior, not as severe as the near-5% expected by analysts, according to Visible Alpha. Starbucks shares rose over 7% on Wednesday.

Though only five months into the job, Niccol’s current strategy of change resembles a theory employed in the high-crime New York City of the 1990s. The idea is that minor issues, like broken windows, create an environment of disorder that begets bigger problems. That makes fixing such blemishes important. In Starbucks’ case, that might mean making often run-down stores, overloaded by byzantine orders spanning a vast menu, more comfortable and stress-free. Indeed, the company is cutting down its beverage and food options by 30%. Ceramic mugs and handwritten notes on cups spruce up the customer experience, as does banning bathroom access for freeloaders.

It’s a reasonable idea to get Starbucks back to its roots and entice more java drinkers. But expectations for Niccol are very high: the stock has risen 38% since the company announced he would take the top job in August. That reflects his success at Chipotle, where he turned around a business reeling from outbreaks of food-borne illness by streamlining production and making better queso. Under his tenure, the company’s share price shot up by almost 800%.

Powered by enthusiasm for this track record, Starbucks now trades at 30 times expected earnings over the next twelve months, according to LSEG, compared to around 20 times a year ago. This despite still-tumbling same-store sales, particularly in China, long a sore spot amid rising competition and weaker consumer spending. Niccol said he visited the country last week and is optimistic, but the challenges call for bigger moves than anything laid out thus far. Investors, certainly, seem to expect a taste of a far bolder brew.

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CONTEXT NEWS

Starbucks on Jan. 28 said that same-store sales declined 4% year-over-year for the quarter ending Dec. 29, better than the roughly 5% drop expected by analysts, according to Visible Alpha. Total revenue for the coffee chain was $9.4 billion, flat compared to a year earlier. Earnings fell 24% to $781 million.