Starbucks recovery plan is working, says Mike Khouw on how to trade the stock

• Starbucks has grown from 700 stores in the mid-1990s to 41,000 today, but mobile ordering rushed the experience and quality declined before new CEO Niccol began recovery efforts
• Stock trades at 30x forward earnings (~$3.12 EPS estimate) and 17.6x forward EBITDA, significantly above the industry average of ~12x
• Options strategist recommends selling a November $85 put and $105 call for $2.25 credit, targeting 16% annualized return if stock remains stable, as implied volatility has exceeded realized volatility

Summary: Starbucks Recovery Plan Shows Progress, Options Strategy Recommended

Key Developments:

Starbucks (SBUX) is experiencing improved operational performance under CEO Brian Niccol's recovery plan. The company has grown from 700 stores in the mid-1990s to 41,000 locations today but faced challenges with rushed mobile ordering, declining store cleanliness, and overwhelmed baristas. Recent improvements focus on enhanced in-store experiences, with employees becoming more engaging and stores feeling less corporate.

Financial Metrics:

• Forward P/E Ratio: Trading at approximately 30x forward earnings (consensus forward adjusted EPS ~$3.12)
• EV/EBITDA: 17.6x forward estimated EBITDA, significantly above the industry average of ~12x
• Valuation concerns: High multiples are limiting stock appreciation

Strategic Moves:

In April, Starbucks finalized divesting 60% of its China retail operations, strengthening financial flexibility and potentially enabling future share buybacks while maintaining dividend commitments.

Trading Recommendation:

Options analyst Mike Khouw recommends a short premium strategy exploiting elevated implied volatility:

• Sell November $85 put
• Sell November $105 call
• Net credit: $2.25

This short strangle could yield 16% annualized return if the stock remains stable. Over the past two years, implied volatility has consistently exceeded realized volatility, making options appear expensive relative to actual stock movement.

Risk Parameters:

The strategy risks assignment at $107.25 (13% above current price) or $82.75 (12% below current price).

Market Implication:

While operational improvements are evident, premium valuations suggest limited upside, making income-generating options strategies more attractive than outright equity positions.