What makes Wall Street believe that Brian Niccol is the ideal candidate to revive Starbucks and put an end to the Howard Schultz era?

• Chipotle CEO Brian Niccol was appointed as Starbucks' new chief executive following the ouster of Laxman Narasimhan.
• Starbucks' stock was upgraded by Piper Sandler, TD Cowen and Baird following the leadership changes.
• The appointment of Niccol may signal the end of Howard Schultz's influence over the global coffee chain he created.

Wall Street believes that Brian Niccol is the appropriate individual to revive Starbucks and surpass the Howard Schultz era.

On Tuesday, Starbucks appointed Niccol as its new CEO and chair, replacing Laxman Narasimhan who took over in March 2023. Niccol's task will be to revive demand for the company's coffee as its U.S. business has been struggling in the last two quarters with same-store sales declines.

According to TD Cowen analyst Andrew Charles, the appointment of a renowned restaurant CEO as Starbucks CEO and Chairman indicates a new era is beginning.

The stock of Starbucks surged by 20% in the afternoon trading session following the news of the company's revival, while Chipotle's stock dropped by 9% as investors expressed disappointment over the departure of their longtime CEO.

Starbucks stock was upgraded by Piper Sandler, TD Cowen and Baird following the leadership changes.

Recently, Starbucks' sales have been sluggish due to a challenging consumer environment, worsening customer experience, and rising competition from smaller coffee shops. Analysts have praised Niccol as the ideal candidate to address these issues.

According to Oppenheimer analyst Brian Bittner, SBUX's dream hire is a leader who can provide a fresh perspective on the company's operations, competitive positioning, and overall strategy.

End of an era?

The hiring of Niccol could potentially diminish Schultz's significant impact on the company he transformed into a worldwide coffee empire.

David Palmer, an Evercore ISI analyst, wrote that Brian is the restaurant executive with the gravitas to tackle the Howard Schultz Founder 'overhang.'

Schultz served as CEO from 1986 to 2000, from 2008 to 2017, and then from 2022 to 2023. He stepped in twice to save the company when sales slowed down. However, his last return sparked concerns about the company's succession.

Despite swearing not to return as chief executive, the presence of the previous CEO still looms large over the company. In May, after a difficult quarter for Starbucks, he wrote an open letter on LinkedIn about the company's challenges and offered advice to its leaders, without mentioning Narasimhan.

Despite his retirement, Schultz's involvement in the company continues to be a concern for investors, according to Morgan Stanley analyst Brian Harbour. Meanwhile, Mellody Hobson, who has taken over as lead independent director, revealed on CNBC's "Squawk Box" that she kept Schultz informed about the discussions with Niccol, even though he no longer has a formal role within the company.

Schultz retains a significant stake in Starbucks, holding approximately 2% of the company's shares.

The chairman emeritus, Schultz, endorsed Niccol's hiring in the press release announcing the shakeup. He stated that he believes Niccol is the leader that the company needs at a "pivotal moment in its history."

Niccol, a seasoned restaurant CEO, may lead Schultz to finally move on as CEO. As chair of the board, Niccol will have greater freedom to implement changes.

Don Bilson, a Gordon Haskett analyst, wrote that investors will no longer care what Niccol has to say because he now has control and there is no space for a backseat driver.

Niccol has experience taking over founder-led brands and making them his own. When he joined Chipotle in 2018, he replaced founder Steve Ells, who had led the chain since 1993. Niccol relocated the burrito chain's headquarters from Denver to Newport Beach to attract different talent and potentially evolve the brand from being founder-led, as Bernstein analyst Danilo Gargiulo wrote in a note.

Challenges ahead

Although many analysts applauded Niccol's selection, others expressed reservations, pointing out that Starbucks is a significantly larger and more intricate enterprise than Chipotle.

According to BTIG analyst Peter Saleh, Starbucks is a more complex model than Chipotle, with various company and licensed stores, domestic and international locations, and a substantial presence in struggling China.

Although Niccol has been pushing to expand Chipotle's presence outside the U.S., the company has few licensed locations and a small international footprint, with only some airport restaurants.

While investors have recently focused on Starbucks' domestic performance, the chain's second-largest market in China has continued to struggle as competition there intensifies and the country's economy slows.

Narasimhan announced on the company's recent conference call that he was considering "strategic partnerships" for its China business, which could include a joint venture, tech partnership, or other options. However, Niccol's appointment may indicate that Starbucks is abandoning this exploration, despite his experience with spinoffs from his time as head of Taco Bell. During his tenure, the conglomerate spun off its China business into a separate entity.

Despite the continued popularity of Chipotle's burritos, economic concerns have decreased consumers' desire for coffee, which may pose a greater challenge for Niccol than investors expect.

"Nick Setyan, a Wedbush analyst, stated that the challenge for him is to connect with a new customer. He added that while the company has the power to change the direction of macro headwinds, he believes the shareholder euphoria expressed in the share price this morning is premature."