Motley Fool Money: "Starbucks' Slow Drip Recovery"
Release Date: January 29, 2025

Hosted by Dylan Lewis, Ricky Mulvey, and Mary Long

1. Introduction

In the January 29, 2025 episode of Motley Fool Money, host Dylan Lewis delves into Starbucks' latest financial performance, examines corporate acquisition maneuvers within the building products sector, and explores the challenges and opportunities in the clothing rental industry. The episode features insightful discussions with Motley Fool analyst Anthony Chavone and analyst Nick Seiple, alongside Mary Long, shedding light on significant market movements and strategic business decisions.

2. Starbucks' Performance and Strategic Shifts

A. Financial Results Overview

Dylan Lewis opens the discussion with a focus on Starbucks' recent financial results, highlighting the mixed sentiments surrounding the company's performance under the new CEO, Brian Niccol.

• Revenue and Earnings:
  Anthony Chavone (00:45): "It was a brutal quarter for Starbucks. Revenue of $9.4 billion was flat from the prior year. Global comparable store sales declined 4%, largely driven by weak sales in the US."
  Earnings per share fell by approximately 22% compared to the previous year. Despite these setbacks, Starbucks' stock saw a modest rise of about 6%, attributed to better-than-expected performance.

B. Strategic Initiatives Under Brian Niccol

The conversation shifts to Niccol's "Back to Starbucks" strategy aimed at revitalizing the in-store experience and reconnecting with customers.

• Enhancing In-Store Experience:
  Anthony Chavone (02:02): "This back to Starbucks strategy includes fewer discount-driven offers, menu simplification, and making the store more inviting with features like handwritten notes on cups and reintroducing ceramic mugs."

• Operational Improvements:
  Niccol emphasizes improving staffing and investing in technology to streamline mobile and in-store orders, reducing customer wait times. Chavone remarks, "Improving staffing in certain stores to increase throughput as well as investing in technology... is really going to be a big thing moving forward." (02:45)

C. Market Valuation and Future Outlook

Despite the recent challenges, Starbucks maintains a robust market position, with a significant increase in market capitalization since Niccol's appointment.

• Market Capitalization Growth:
  Anthony Chavone (05:03): "Since Brian Niccol was named CEO last August, Starbucks has added about $35 billion in market cap, currently around $110-120 billion."

• Valuation Concerns:
  The Price-to-Earnings (PE) ratio has climbed back into the mid-30s, indicating that while Starbucks remains valued at a premium, there is cautious optimism regarding its ability to execute strategic improvements.

D. Long-Term Growth Potential

Chavone draws parallels with McDonald's historical expansion strategies, suggesting that Starbucks still has ample room for growth despite high store saturation.

• Anthony Chavone (07:59): "Just like McDonald's now is opening more stores than ever, I think we see a similar story play out with Starbucks."

3. Boardroom Intrigue: Brad Jacobs and QXO's Acquisition Ambitions

The episode transitions to corporate acquisition strategies, focusing on Brad Jacobs' company, QXO, and its pursuit of roofing supply company Beacon amidst resistance.

A. Brad Jacobs' Acquisition Strategy

Brad Jacobs is portrayed as a serial entrepreneur known for creating and expanding billion-dollar companies through strategic acquisitions and consolidations within fragmented industries.

• Anthony Chavone (08:50): "Jacobs... buys a company in a fragmented industry, consolidates it, and adds technology to improve operations. He's done this with United Rentals and XPO Logistics."

B. QXO's Acquisition Attempt of Beacon

QXO, initially a software company rebranded under Jacobs' direction, is eyeing Beacon as a prime acquisition target. However, Beacon resists by implementing a poison pill strategy.

• Anthony Chavone (10:10): "Beacon was interesting to trade at a decent valuation and seemed like an easy roll-up for him, but they believe they have negotiating leverage over QXO."

C. Market Perspective on QXO's Moves

Chavone expresses cautious interest in QXO, noting Jacobs' successful track record but awaiting tangible outcomes from QXO's initial acquisitions.

• Anthony Chavone (11:35): "I'm paying attention from a distance because the track record from Brad Jacobs is awesome... I'd get more interested after they close their first deal."

4. Clothing Rentals: Rent the Runway vs. Urban Outfitters' Nuuly

In the latter half of the episode, analysts Nick Seiple and Mary Long dissect the challenges faced by the clothing rental industry, comparing Rent the Runway with Urban Outfitters' Nuuly.

A. Rent the Runway's Struggles

Rent the Runway, once a darling in the subscription clothing sector, has seen a significant decline in its stock performance and subscriber base.

• Nick Seiple (13:15): "It trades at closer to $8.50 per share, down from a high of $385.80 shortly after its IPO in 2021."

• Mary Long (14:04): "Delivering an appealing consumer service is difficult to do profitably... Rent the Runway continues to burn cash without sustaining subscriber growth."

B. Urban Outfitters' Nuuly: A Promising Alternative

Conversely, Urban Outfitters' rental service, Nuuly, is highlighted as a more successful venture within the same industry.

• Subscriber Growth and Performance:
  Mary Long (16:22): "Nuuly has over 300,000 subscribers, with significant growth rates—81% in 2023 and another 51% in early 2024."

• Operational Profitability:
  Nick Seiple (18:56): "Nuuly had its first full year of operating profit in 2024, unlike Rent the Runway, which remains unprofitable."

C. Strategic Advantages of Nuuly

Nuuly benefits from Urban Outfitters' retail expertise and diversified brand portfolio, allowing for better inventory management and cross-selling opportunities.

• Mary Long (19:35): "Nuuly's retail DNA and ability to predict market demand have given it an edge over Rent the Runway."

• Market Positioning:
  Nuuly is positioned as the largest rental platform in the U.S., continually expanding its subscriber base by attracting new customers who previously did not engage in clothing rentals.

D. Leadership and Family Business Dynamics

Urban Outfitters is a family-controlled business, with the Hain family at the helm, potentially influencing strategic decisions and long-term commitments.

• Mary Long (23:42): "The Hain family controls over 25% of shares, with leadership deeply embedded in the family, indicating a strong commitment to the business."

E. Investment Potential and Market Perception

Analysts discuss the investment viability of Urban Outfitters, noting its diversified growth through brands like Anthropologie and Free People, despite challenges within the Urban Outfitters brand itself.

• Anthony Chavone (25:19): "If Nuuly can prove itself, there's significant growth opportunity. The multiple today reflects the business's past rather than its current potential."

• Mary Long (25:19): "Nuuly's growth and Urban Outfitters' various sub-brands like FP Movement show promising trends, making it a compelling watch for long-term investors."

5. Conclusion

The episode concludes with Dylan Lewis emphasizing the importance of independent research before making investment decisions, reminding listeners to consider Motley Fool's recommendations critically. The discussions around Starbucks, QXO's acquisition strategies, and the contrasting fortunes of Rent the Runway and Nuuly provide a comprehensive overview of current market dynamics and investment opportunities.

Notable Quotes with Timestamps

• Starbucks' Quarterly Performance:
  Anthony Chavone (00:45): "Revenue of $9.4 billion was flat from the prior year. Global comparable store sales declined 4%."

• Back to Starbucks Strategy:
  Anthony Chavone (02:02): "Fewer discount-driven offers, menu simplification... making the store more inviting."

• Market Cap Growth:
  Anthony Chavone (05:03): "Starbucks has added about $35 billion of market cap, which is absolutely enormous."

• Nuuly's Subscriber Growth:
  Mary Long (16:22): "Over 300,000 subscribers," and "81% subscriber growth in 2023."

• Leadership Insight:
  Mary Long (23:42): "The Hain family has controlled the business since it was founded... Dick Hayne remains the chairman and CEO."

• Investment Perspective:
  Anthony Chavone (25:19): "If Nuuly can really prove itself, there’s a significant opportunity for growth."

This detailed summary captures the multifaceted discussions from the "Motley Fool Money" episode, providing listeners and non-listeners alike with a comprehensive understanding of Starbucks' ongoing challenges and strategic responses, corporate acquisition strategies within QXO, and the evolving landscape of the clothing rental industry.