Happy Fourth of July to all my American friends south of the border!
As a Canadian, I’ve always enjoyed watching the holiday festivities on TV. The beauty of a country celebrating its birthday is that for one day, at least, everyone seems to get along. It’s the same way on July 1 when Canadians celebrate our country’s birthday.
One thing people do on both sides of the border to celebrate is have a BBQ. And what do you do at BBQs? Eat a lot of food and consume alcoholic and non-alcoholic beverages.
So, for today’s look at unusual options activity from Wednesday’s trading, I’ve got a Starbucks (SBUX) put option worth considering.
The Put in Question
Four Starbucks puts were unusually active on Wednesday. They’re listed below.
Three of the four puts were in the money. I want to focus on the one that was just out of the money: the Aug. 2 $75 strike with a $1.90 bid price.
I say bid, not ask, because I’m bullish on Starbucks stock, and think it’s temporary issues hurting its share price will dissipate as it continues to roll out tweaks to its operations in next several weeks to make the stores more efficient, and more importantly, the baristas working there, happier and less stressed.
What’s Happening at the World’s Largest Coffee Shop Chain?
In case you didn't hear, Starbucks same-store sales declined in the latest quarter in the U.S., the first time in a long while.
U.S. same-store sales in the second quarter fell 3% on the backs of a 7% reduction in transactions, offset by a 4% increase on the average sale. Meanwhile, its international same-store sales fell 6%, with a 3% decline in both transactions and the average sale.
Not surprisingly, operating income at its U.S. stores fell 6%, while operating income was down 26% internationally.
If that wasn’t bad enough, the company’s guidance was not good. It lowered its U.S. same-store sales from an earlier estimate of 5% growth at the midpoint to as much as a 3% decline in 2024.
“While it was a difficult quarter, we learned from our own underperformance and sharpened our focus with a comprehensive roadmap of well thought out actions making the path forward clear,” commented Rachel Ruggeri, chief financial officer.
SBUX stock has lost 14% of its value since announcing earnings in late April. As the CFO said, Starbucks plans to remedy the current situation at its stores.
What Is It Doing to Stem the Tide?
The company is calling its plan of action the “Siren Craft System,” which is intended to improve the efficiency and speed of a store while also making the job for baristas more enjoyable.
Although it does seem counterintuitive for a business to improve efficiencies, while also making the work environment better, the two are not mutually exclusive.
I'm someone who goes to Starbucks everyday. I see up close how the store functions.
At times, I marvel at how many drinks baristas are able to push out. However, at other times, especially when I'm at stores I don't normally go to, I see things that make me scratch my head. Notably, in my situation, when I order a cold drink and a hot drink, the cold drink gets made before the hot drink.
Presumably, the person who orders those drinks (me) might like to have a sip of the hot coffee while waiting for the second cold drink. In my experience, it happens in reverse. To be fair, I’m ordering an Americano, which takes longer than a regular coffee. But I digress.
The point is, Starbucks’ Siren Craft System is intended to improve the order process for the people on both sides of the counter.
“Starbucks said it will also change the order in which beverages are made. Previously, cold drinks were prioritized from start to finish, even if a hot beverage order came in first, as pulling espresso shots was the last step,” CNBC reported on July 1.
“This could create a traffic jam in the drive-thru, for example, if a person ordered one of each beverage, as the cold item would be ready while the hot drink was still in production.”
You can read more on the Starbucks website. Here’s a link.
I’ve followed Starbucks for several decades. What it does best is address pain points in its operating system. I have every confidence these plans will work.
Starbucks Is a Buy
Except for the March 2020 correction, SBUX stock has consistently traded above $70 since February 2019. That’s almost four-and-a-half years. It currently is 9% above $70.
While it could fall below that in the weeks ahead, I think most of the damage is done, although we won’t know for sure until it announces Q3 2024 results on July 25, three weeks from today.
As of Q2 2024, Starbucks’ trailing 12-month free cash flow was $3.95 billion. Based on an enterprise value of $108.47 billion, it has a free cash flow yield of 3.6%. I consider anything under 4% to be overvalued.
However, I went back 21 quarters to March 2019. According to S&P Global Market Intelligence, only on six occasions was its current free cash flow yield higher, the most recent being June 2022.
So, from my perspective, if it can resolve this, its shares are more than reasonably priced.
Getting back to the Aug. 2 $75 put, if you sold it, the annualized return based on a $1.90 bid price and a $76.26 closing price would be 31.5%. With only 29 days to expiration, your $73.10 net price should you have to buy the shares would be a reasonable entry point.
However, if it doesn’t fall further, you’ve got $190 in your pocket for less than a month’s work.
Drink up, indeed!
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
