Starbucks’ turnaround plan is well underway. Mike Kou on how to trade the coffee giant

In the 1990s, there couldn’t have been a cooler place than your local restaurant. starbucks.

Howard Schultz, the company’s longtime CEO, recalled going to Milan, sitting in one of the many coffee shops, and having an epiphany. He saw how a simple mid-afternoon espresso could lift a city’s mood and thought, why not bring it to Seattle?

Of course, recreating Milan’s atmosphere and tenor is easier said than done, so Schulz, ever the marketing guru, repackaged the experience. Sandstone floors, comfy chairs, and Wi-Fi have given way to a more romantic Italian cave, but the effect is still the same: a seven-minute getaway from the urban jungle.

And worked. Splendidly. Starbucks has grown from 700 stores in the mid-1990s to 41,000 today.

But more isn’t always better, and the frantic pace of mobile ordering has changed the Starbucks experience. It wasn’t special anymore. The inside of the store became even dirtier. The line was even longer. The baristas were quickly overwhelmed. New CEO Brian Nicol has vowed to change that.

So far, it’s working fine. Improved in-store experience. Starbucks stock is up 12% this year, but it’s far off its recent highs and has been in dead money for the past five years. Improved execution and tight valuation overhead make November 85/105 stocks attractive to sell. Through a moderate growth environment and fairly ambitious valuations, premiums can be collected during the turnaround.

My own visit to the San Diego area store reinforced my recent experiences elsewhere. Employees are trying to be friendlier and more engaging. The experience is more like a local business and different from McDonald’s corporate kiosks these days.

However, valuations remain a lid on the stock price. The consensus forward-adjusted EPS estimate is approximately $3.12, meaning Starbucks trades at approximately 30 times forward earnings. Enterprise value is 17.6 times estimated future EBITDA, significantly higher than the industry average of approximately 12 times.

Support comes from potential capital returns. The sale of 60% of its China retail business, completed in April, strengthens its financial flexibility and could create room for future share buybacks, along with the promise of a dividend.

From an options perspective, implied volatility (the level of option premium) has averaged well above realized volatility over the past two years. Simply put, options look expensive compared to the price movement of the underlying stock, making short-term premium plays attractive. Investors appear to be paying too much for uncertainty.

If stock prices remain where they are, this strategy will return you 16% annually. The big risk is going short at $107.25, 13% above the current price, or long at $82.75, 12% below the current price.

Disclosure: Tidal owns/holds all securities mentioned in the article.

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This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor.

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Correction: This column has been updated to reflect the number of Starbucks stores.