Starbucks turnaround will take time. This options strategy works if shares remain range-bound
Despite Starbucks CEO Brian Niccol’s efforts to revitalize the coffee brand through the “Back to Starbucks” initiative , structural challenges continue to erode its performance. Once touted as a primary growth driver, China, its second-largest market, grew nominally by only 5% year over year in U.S. dollar terms. However, adjusting for a strengthening yuan and inflation over the same period, China’s growth was flat to slightly negative. Same-store sales fell 1% in fiscal 2025. Part of the issue is competition from domestic rival Luckin Coffee . In November, Starbucks announced the sale of a 60% stake in its China operations to private equity firm Boyu Capital for $4 billion. Starbucks retains a 40% stake as it shifts to an asset-light model. This divestment signals a strategic retreat in a region once touted as a key driver. Domestically, Starbucks has faced declining consumer traffic, driven by stretched consumer finances, high prices, and long wait times for orders. Same-store sales fell 1% in fiscal 2025 , and dropped 2% in North America. Foot traffic fell 2% globally, but 4% in North America. The consensus is that the trend may reverse in the fiscal year ending September 2026. The pricing pressures were not solely the company’s fault; rising costs, including coffee, are pressuring margins. Although off the mid-year highs of 401.10 cents per pound, the benchmark NYB Arabica is 23% higher year over year. The company has resorted to closing underperforming stores — North American locations fell by 113 stores to 18,311 in fiscal 2025. Of that decline, the U.S. represented 77 net store closures. With this backdrop, it is unsurprising that analysts have continued to reduce fiscal first- and second-quarter earnings estimates. At the beginning of 2024, the consensus view was that Starbucks would earn ~$1.30 per share for the quarter ending Dec. 31. The street’s current estimate is 54% lower, expecting just 60 cents per share. Not every bit of news about Starbucks is bad. Free cash flow is expected to grow by just under 6%, and I am a habitual Starbucks coffee drinker. The stock has spent the entire post-Liberation Day period below the 200-day moving average, but it is testing it now, closing above it, if only barely, for two consecutive days. We’ll see if that holds. The steps taken to stabilize the business, combined with the secular headwinds and valuation, may keep the coffee giant range-bound over the next several months. A short put, combined with a short call spread (sometimes referred to as a “Jade Lizard”) would generate some standstill yield, take no meaningful upside risk, although it would assume the risk of purchasing the stock at an effective price of just under $80 per share, close to its recent lows. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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