Big Week For The Consumer… And Pulling Money Out Of China 8/13/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast guy to fix the problems at Starbucks. A deep dive straight ahead. Plus, inside the mind of Main Street, how investors are feeling about the market after the recent bout of volatility. We'll break down the results coming up. And later, the traders take on who could be the next activist target on Wall Street. What's behind Dell's latest winning streak? And the battle with insurance as millions battle obesity. I'm Melissa Lee coming to you live from Studio B at the Nasdaq. On the desk tonight, Tim Seymour, Steve Grasso, Dan Nathan, and Guy Adami.

0:46And we start off with that CEO switch up. It's Starbucks shares spiking nearly 25 percent, their biggest increase since going public in 1992. That after news, Chipotle chief Brian Nicol will take the reins at the struggling coffee chain. Starbucks has been a favorite target of activist investors since now ousted CEO Loxman Nara Simmon took over last year. Elliott and Starboard have both taken stakes in the company, and earlier this year, former CEO Howard Schultz penned a scathing open letter calling on the company to, fix the stores. Will this change in leadership help do that? Let's bring in Kate Rogers, some of the reaction to today's news.

1:21A lot of analyst upgrades on the stock today, Kate. Certainly busy day, Melissa. Well, Starbucks chair Melody Hobson said it to you all this morning on Squawk Box that nickel is, quote, the right leader for this moment. And clearly, Wall Street agrees. Analysts pouring in mostly positive sentiment. TD's Andrew Charles writing, in our view, Starbucks picks up a Hall of Fame restaurant CEO and his appointment as Starbucks CEO and chairman suggests a new era is underway. BTIG's Peter Saleh saying we believe this is a significant victory for Starbucks and Evercore ISI's Brian Palmer, writing Brian is likely the one restaurant executive that has the gravitas to address the Howard Schultz founder overhang.

1:57And to that point, Starbucks founder and chair emeritus Howard Schultz out with a key endorsement in a statement in the company's release this morning saying, quote, he has my respect and full support of nickel who takes the reins in less than a month. Elliot, as you mentioned, the activist investor that had built a sizable stake in the company also saying it welcomes his appointment and starboard out with a similar vote of confidence. Quote, we believe this represents a very positive outcome for partners, shareholders, and customers. Scott Wapner today also reported via his sources that Tryon is happy with today's outcome and sold their Starbucks stake after building a substantial holding in recent months.

2:31And as you mentioned, Starbucks shares closing up nearly 25 % today. Melissa, remarkable. Back over to you. All right. Kate, thanks. Kate Rogers. And of course, the flip side is Chipotle shares Took a plunge here. I go to Tim first. You've been a shareholder in Starbucks. It's an exciting day. I'm not as big as I want to be. In fact, I kind of, I'm sure I've said somewhere in the last few weeks, I think I'm going to get it lower than it was yesterday. And so the dynamics in terms of the near-term trends for Starbucks, I don't think really change. I think they've got headwinds when it comes to both the consumer, when it comes to China, when it comes to even some of the issues within the stores.

3:02But what this news does, and I think if you listen to a couple of the analysts, and I think it's Piper that calls this a game changer. It's a game changer for the analyst community, too, because I think it allows them to put a higher multiple on the stock. I don't think it changes the EPS trajectory over the next couple of years. But as a shareholder, very happy about this move, would like to have been bigger into this move. I do think it's a it's a it's a be careful because what worked for CMG isn't necessarily the easy fix for Starbucks. And I think that's the dynamic here. And at this point, this went from a value play.

3:34if you believe recent guidance to one where I think you actually, it's not terribly cheap. And the point on that is that when nickel came in to CMG, there was that food, that illness, right? That outbreak that had to be fixed. There was something that was actually tangible that had to be fixed and was fixable. This is a slightly different situation where the macro is working against Starbucks as well as the entire industry. Yeah, that was walking into effectively a 2-15 team that had talent and it's basically making a couple tweaks. This is a team that's obviously been sort of mediocre for a long time.

4:07It's sort of on the other side of, I think, a growth trajectory. It doesn't mean they can't pull it off and it doesn't mean he's not the right person for the job. But when you see a move of this magnitude, I guess the question you have to ask, are you going to chase here or are you thinking you're going to get it cheaper? I'm sort of with Tim on this. And if you go back and look, I mean, for the technicians out there, this level we've traded up to today is basically the third point of a downtrend that we've been in for the last three and a half or so years. So I think it's great news. I think they get re-rated, but I don't think the stock is just a straight line higher from here.

4:35Yeah, so when you get a situation where, you know, the opening print is the low of the day and you have this sort of range that it had today, that's a pretty powerful move on that sort of volume. But when you think about it this way, it's like if Warren Buffett had taken a stake in this thing, would the stock have been up 25 %? You know what I mean? And Tim's point about the fundamentals of this company, they're not likely to be changed anytime soon. If you think about 10 % of their sales come from China, I think same-store sales dropped 14 % in the last quarter. Sales are down 11 % or something like that year over year.

5:05So this is not an easy fix as it relates to outside the U.S., and we know that there's just a lot of competition. Consumer discretionary is kind of stretched here. So to me, I think it kind of way, way overshot here. You're going to get the kitchen sink quarter, and echoing everyone else's sentiments about it, 50 % of the stores are located outside the U.S., with 2 % of CMGs located outside the U.S. Completely different story. Digital, he brought that to CMG. With digital, it's already mature. So there's 24 million people on their digital platforms, both CMG and Starbucks. Go ahead. The technology investment, though, in Starbucks, there could be further investment there.

5:46I mean, he brought, for instance, the autocado to CMG. I'm not sure what he's going to bring to Starbucks that will be a robot. behind the counter, but the baristas probably could be replaced with efficiencies there. But I think that I believe the stock probably comes in from this spike higher because it's not a plug and play. It's not an easy fix. Right. As somebody who likes a Chipotle bowl as much as I do. I do. And I get disappointed when they don't have the ingredients I want. Right. Sorry. The question is, you know, Hobson's point was that, you know, nickel is a retailer through and through.

6:25He really is in tune with the consumer. He's an inspirational leader. That's probably a little bit of what Starbucks workforce needs right now, a lift, because they've really been sort of disappointed by the trajectory of the stock, I'm sure, in the past year or so. For that, are you optimistic? Well, I think there's no question that there's been a confluence of events that have made the CMG story a great stock to own. Everyone's done the map on how much the stock went up during nickel's tenure there. It's north of 700 percent since 2018. But he came into time where I think their loyalty program, their digital dynamics were things that also were just happening.

7:01They've been happening everywhere. I think there's been some changes to the menu. Is he an innovator? But I mean, some of this really has been the story there. It's been about it's been around the menu. I think there are near term same store sales challenges. I do think there are margin headwinds. And these are things that, again, I would have said yesterday. And I think the stock was under some pressure. So, no, this definitely does not help. And I think there are a couple of folks, including the CFO, who had resigned or at least put in his resignation and now says he's going to stick around.

7:29And if there's a shot at the CEO chair, I think you probably do stick around. I think there's a lot of continuity. I think there's a very strong team. You know, let's continue with the sports analogies. The bench is strong and I think you have someone who could step in. The question is, was this stock already under some pressure for fundamental reasons that had the investor community already cautious? Just the answer is yes. And what's he going to do with labor? That's probably one of the key headwinds that you see with Starbucks right now. Labor and China to Dan's point. So if he doesn't have that real deep, vast experience in international and you don't know what to do with labor, he's more of a marketer and he's great at that.

8:04Okay. So it sounds like you guys would probably fade this move of up 25 percent or so. Do you buy Chipotle? Yes. I mean, look at the amount of volume it traded today. What's it down? Probably 33 percent from the all time high. That's probably the biggest move we've seen to the downside in quite some time. Maybe, who knows what was going on. I mean, a lot of it was the fundamentals to Tim's point, the valuation, but maybe somebody caught wind of Brian Nichols stepping down. Who knows? But when you have that kind of volume today, I think it traded north of 100 million shares. You're talking about seven or eight times normal volume, flush a lot of people out.

8:35Yeah, I think you take a shot here. You know, you haven't been able to buy it at this type of pullback in quite some time. But I guess the question is, do you have any visibility on where some of these same-store sales trends are? and I think the consumer. They can't increase price anymore. This is not Brian Nickel. I mean, this is definitely a case where I'm a little concerned on where we were. And let's not forget, this is the most expensive stock in its space. It's deserved a high multiple, but I don't know. Yeah, I mean, a lot of the same headwinds that you guys point out for Starbucks exist for CMG.

9:04The reason why I thought there was a lot of upside still left in the tank for CMG, barring the valuation, that's going to be a headwind, but was the international growth. Because I thought you can do that rather simply when you're starting from a base of 2 % located outside the U.S. It felt to me that it was not a layup, but you only had upside. Well, our first guest says, well, the CEO change at Starbucks is a good first step. Challenges for the company remain. Wedbush's equity research managing director, Nick Setien, joins us to explain why he is not one of the many analysts upgrading the stock today.

9:39Nick, great to have you with us. So it's deeper than just who's at the top at this point. It's macro. Chris, thanks for having me. I do. I think a lot of challenges are macro. I mean, the slowdown started at the end of last year, coinciding with McDonald's and much of the industry. And before that, that positive transactions year after year. So everything was fine until the macro slowdown. But Chipotle also had to weather the macro slowdown and didn't weather it better. And so, therefore, that begs the question, isn't Nickel the kind of person that you want at the top at this point? And can't he help the company execute even with that backdrop?

10:22I mean, there's a couple of Chipotle-specific things going on, right? I mean, first of all, they're one of those sort of relative value plays going into this year that we had highlighted. Second, I mean, they're still benefiting from a lot of main innovation. And, again, that's credit to Brian Nickel. But it's not a tool that you can use at Starbucks because they've been doing it for decades now in terms of, you know, LTOs and seasonal offerings. But the carne asada is what drove that big comp and kind of overcame the macro headwinds. And we've already seen a slowdown and a reset in terms of the 2H expectations, the second half expectations at Chipotle.

10:59So the macro is catching up. Hey, Nick, if you're a sell-side analyst, which you are, and you upgrade a stock right after the opening, do you get the previous day's price for all intents and purposes? Help me out with that for a second. I've never upgraded a stock intraday. I think you probably would if it's intraday. Yeah, I guess my only point is, so the analyst community was way off sides of this. The sentiment was really bad. Investors, you know, they couldn't sell it low enough. And so it's interesting to me to see this sort of chase today. Do you think they're going to have the ability to grow into this valuation that looked cheap to the market yesterday, but now looks expensive to it?

11:42I mean, like, you know, on the one hand, it's still trading at a discount to its sort of pre-COVID or historic, any way you look at it. It's still trading at a discount to its historical sort of valuation in terms of where Starbucks is today. today, the bottom line is there's still very, very limited visibility in terms of what they do in FY25. Now, you could have had no CEO, and you're still going over a down 7 % transaction quarter in their fiscal queue, too. So their March quarter is down 3 comp, down 7 transactions. So you have very easy compares to go over next year. So I think, you know, the setup is you basically have a near term where it's completely risked.

12:26You know, what Brian Nichols, no one's really going to care what the current quarter looks like. And you have some very easy expectations and hurdles to go over basically for the next four quarters. But Nick, it's it's I thought one of the most fascinating points you made in the notes you sent to us is that you just think Brian Nichols is a marketing guy. I don't think you were necessarily dismissive of his. In fact, I think you were lauding what he did at Taco Bell, came over, came over to a similar environment with a similar customer base. But but that, you know, marketing is great. And clearly, CMG has been a marketing dynamo over the last few years.

12:59But is that a limitation to what he could do at Starbucks when, in fact, it does seem very operational? Like, I think so. I think, you know, marketing is not Starbucks's problem. You know, their current customer base is still coming in more often. They're spending more than they ever have. The problem is that aspirational customer that came in during the COVID years when stimulus checks were going out, and now they're no longer there, right? Number one. Number two, the day parts have shifted, right? Pre-COVID, you had a bigger morning day part. Now you don't have as big of a morning sort of habitual customer.

13:34And then three, you were more of an urban sort of concept, right? Now, over the last five years, you're building drive-thrus in the Midwest, in the Southeast. So it's a different customer. you have to address. And so maybe he has an opportunity to figure out a way to address that customer. But Starbucks has shifted, and it's just not the same company it was five years ago. Maybe he can bring carne asada to Starbucks. I'm just joking. But would you expect Starbucks to really increase CapEx? I mean, if they're going to lean into sort of technological innovation or improvement in the operations, can we expect to see that?

14:09And so therefore, that could be a speed bump in terms of how the stock trades? I actually think CapEx goes down. I think they curtail the unit growth. And that's where most of the CapEx is. So even if they do, you know, spend incremental on tech, incrementally on technology, I think they're going to curtail unit growth for the next year or two to try to essentially lower capitalization and bump up that same-store sales growth. All right. Nick, thanks for joining us. Appreciate it. Thanks for having me. Nick Setien. So easy comps, that's a good point. because Lakshman has been CEO for about a year or so.

14:45No, he makes, listen, he makes very good points. I admire him for not sort of, you know, being with the rest of the crowd. The herd. Totally. The herd. Because I think the headwinds are still, the headwinds have not abated at all. I mean, it's still challenged. I do think he will figure it out. It doesn't happen over the course of a couple quarters, though. It will take time. And, you know, if you do see, you know, if the market has another downturn, Starbucks is not going to be insulated from that. So I think this is a level where if you've enjoyed this ride like Tryon, I think, did, you sell some stock.

15:13So with Starbucks shaking things up, we thought it would be an interesting exercise to see which other companies could benefit from some activist pressure, maybe a CEO change. Dan, what's your pick? Yeah, Lululemon. This is an interesting one. I mean, like, obviously, Nike, you walk in and you say, ah, I want that. That was up 5 % today. It kept on going here. There's a huge gap from its earnings. Well, Lulu's got a couple of gaps. It's down 50 % of the year. We know there's a lot of competition. We know there was misexecution. We know that the consumer is weakening. But I look at this thing and I say maybe the sentiment's bad enough.

15:42Maybe the chart's bad enough. Maybe the valuation is good enough. If you can see a path towards at least stable forward results, they report, I think, on August 30th here. So to me, this is one that looks really interesting for a whole host of reasons. The balance sheet's in good shape. Maybe it just needs a little bit of a change. Go find some great marketing person who's executed on consumer discretionary, and you'll probably get a nice pop in the stock. Yeah. Tim, what's your choice? At first, I wanted to be Lyft, but ultimately, I got back to Snap. And Snap, when you think about that user base and that engagement, I mean, we're talking about 425, 430 million active users.

16:20You've got an engaged user base. You've got a lack of monetization. This is the story. It's gone on forever. And it just seems like this management team has been unable to do it. They've laid out new initiatives. They've certainly got a playbook that's supposed to be driving growth while staying somewhat cognizant of kind of where their core base is. And yet I think that's also hurting margins. I think Snap has been look at what's been going on in the social media space as an investor in the space. Snap's been a disaster. And yet this is a major, major platform at a time when monetization has not been an issue.

16:49I realize they're apples and oranges in terms of where they sit in the kind of the marketing advertising funnel. But this has been a massive disaster. And I think there's a lot that could be done here. Steve, I thought Iger was the dream CEO. And the timing was perfect for him to shut down Nelson Peltz back then. So it didn't work because the stock price was higher. Your pick is Disney. Oh, sorry. I thought that was an obvious synonymous with that. But I think if you look at it now, the stock price is lower than where it was. Maybe the board thinks that they screwed that decision up. I think that this is a more ripe time to look at not only streaming, but the parks with the consumer slowing down.

17:30Guy. Bugs Bunny, a dog pile on the rabbit, that whole thing, which I never really understood. A dog pile on the rabbit. Like everybody jumps in, piles in and just. And Bugs Bunny. Yeah, it's not cool to do, but I'm going to do it. Thanks for that. Anyway, and I'm going to dog pile on Intel. And it's, listen, you think about it. The market's effectively at an all time high. Semiconductors in this last five years has absolutely been the golden age of semiconductors. Intel can't get out of its own, cannot get out of its own way. I mean, look at this stock move on the back of earnings. So if you can't figure it out now, you can't figure it out.

18:05So if it's any time for an activist that a company now trading at liquidation value, if you look at all the commentary out there, Intel's the company for it. And I hate to be that person, but something's got to give, and I think it's got to give at Intel. They are getting money from the U.S. government to build new foundries. a growth area of the business, but not fast enough. That's the issue. Not fast enough. Not fast enough. And market share continues to evaporate. So, you know, there's some question about in terms of the technology gap is so wide right now. I mean, I'd be a little concerned as the U.S.

18:34government is an investor as well. Yeah. Wasn't it activists who got Gelsinger, the current CEO, in there a few years ago or whenever he came over? I think it was. I think Elliott was in there and maybe a couple others. So, again, it doesn't mean that these activists are always right, you know what I mean? That's a great point. I'd just say, at Starbucks, I think the environment was so right for activists. Not only do you have one activist, but you have the CEO ex-emeritus, you know, Howard Schultz is in there, basically ready to swing the tide and ready to do anything other than this current management team.

19:04It was so ready for someone to tip the apple cart in favor of a change. Brian Nichol is a rock star. Let's be really clear. Again, if you could have grabbed somebody, that's why this headline's so powerful, but Starbucks was ripe for this. Yeah, and And look, try and pull the ripcord, right? Yeah. Immediately afterwards. And Intel gets a new CEO. Stock's going to pop. And any activists in there are going to also pull the ripcord. You know, I wonder if this also, if you were to see a bunch of activists kind of do this sort of stuff, if it draws maybe some strategic buyers of some of these assets.

19:34Because, you know, activism is really a bull market activity. You don't really see it, you know what I mean, when you're in a bear market, that sort of thing. But, again, you know, we might start to see some, you know, companies buying other companies, especially in what might be an interesting period politically over the next, call it, 69 months. You see it in bear stocks, though, in bull markets, stocks that have underperformed within the bull market. And this one is so ripe. Everybody dogpile on the rabbit. Everyone is talking about this. Poor rabbit. It's long overdue. The problem is, can they do anything?

20:08You have to look under the hood and see what efficiencies they can do. Speaking of dogpiling, another rabbit emerges. Just right now? Yes, Elliott's seeking 10 board seats on Southwest Airlines. So that's crossing right now. Not as many. I was going to say. I know, 10 is a lot. Sounds like most of them, if you ask me. So, I don't know. We'll bring you the details when we have them. Coming up, a warning in the Home Stretch. Home Depot flagging weaker sales in the back half of the year. What it could mean for Walmart and other retailers reporting that's next. Plus, shares of Boeing getting a bump as a planemaker posts its best month of net orders this year.

20:42But is it enough to help Boeing stock change course? We'll debate that. Don't go anywhere. More Fast Money in two. This is Fast Money with Melissa Lee right here on CNBC.

21:00Welcome back to Fast Money. Home Depot making a midday comeback after falling nearly 5 percent pre-market on its second quarter results. The retailer beating on the top and the bottom lines, but warning of weaker than expected sales in the second half as economic uncertainty causes consumers to defer home improvement projects. Home Depot's results come ahead of Walmart on deck to report before the bell on Thursday. That stock falling today, but still up nearly 30 percent this year. What do you think is behind that turnaround before the session? Well, I think it's a combination of that. Also, the full year comp sales for Home Depot were better than expected.

21:32I mean, people were expecting a negative number. And if you think about where that bar was, it was incredibly high. I mean, ultimately, Home Depot has such a solid business and their pro business is so margin accretive to the overall story. They have places to smooth out and go through difficult numbers. I think the reaction, though, tells you that people are probably shooting first and asking questions later. It's great that they got some more reassurance. But I think Home Depot is going to drift lower. My view on discretionary is such that I don't believe Home Depot can stay here. So how do we impute this onto Walmart?

22:07Is that actually good news for Walmart? I don't know if you can translate it to a Walmart. You know, to Tim's point, with the exposure to the pro contractor, that was due to an acquisition that Home Depot had. So I guess they looked through that and they gained some market share there. But if you look at the average ticket size, that dropped. Customer transactions, that dropped. If Walmart has a headwind, the economy's in trouble. So I think it's going to be a good barometer for the overall economy if Walmart doesn't perform. Yeah, we talked about operating margins. That was to me was a bright spot, 15.3 percent.