Starbucks is Expected to Report Big Earnings This Quarter. The Best Way to Trade It

Starbucks (SBUX) is set to release its quarterly earnings report on Tuesday after the market closes, and expectations are high for a significant stock move. In this update, we'll explore the company’s current position and outline a potential options strategy designed to manage the uncertainties surrounding the upcoming results.

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Originally founded in 1971 as a coffee bean wholesaler, Starbucks has evolved into a global powerhouse, boasting an impressive 40,199 stores by the end of its fiscal year in September 2024. While its store expansion and revenue growth have been strong, the same cannot be said for its profitability. Since reaching its peak in 2017, the company’s net income growth has largely plateaued, raising concerns among investors.

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Operational challenges have played a big role in Starbucks' financial stagnation. Customer dissatisfaction has been rising, and growth in net income and free cash flow has been notably sluggish. In an effort to reinvigorate the company, Starbucks named Brian Niccol as its new Chairman and CEO in September 2024. Niccol, who earned a strong reputation for revitalizing Taco Bell and successfully leading Chipotle Mexican Grill, faces several operational hurdles that critics argue must be addressed quickly.

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One of the main issues is Starbucks' increasingly complicated menu. The expansion of drink options has slowed service, overwhelmed baristas, and caused inconsistent product quality across locations. The emphasis on elaborate, customizable drinks has shifted focus toward mobile and drive-thru orders, which often leaves in-store customers frustrated, particularly those waiting for simpler beverages.

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Mobile orders, once seen as a cutting-edge growth driver, now account for roughly 30% of Starbucks' U.S. transactions. However, the heavy reliance on mobile orders has created operational snags. Problems like inaccurate wait times displayed on the app and overcrowded pickup areas have contributed to chaotic in-store experiences, turning what was once a relaxed coffeehouse atmosphere into what former CEO Howard Schultz called "mosh pits" during peak order surges.

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Niccol’s leadership comes with a strong mandate to not just stabilize Starbucks’ operations but also to revive its traditional brand identity. His new "Back to Starbucks" strategy is ambitious, aiming to streamline operations and restore the cultural experience that once set the chain apart.

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Key initiatives include simplifying the menu to focus on “fewer, better” offerings, improving service speed and product consistency, and bringing back traditional coffeehouse elements such as ceramic mugs, hand-written names on cups, condiment bars, and cozy seating areas to encourage customers to linger. Enhancements to the mobile ordering system are also underway, with plans to better separate pickup areas, limit over-customization, and improve wait-time accuracy within the app.

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Adding to Starbucks' operational challenges is the pressure of rising costs. Coffee prices have surged notably, with exchange-grade green Arabica beans priced at $3.08 per pound as of December 31, 2024—an increase of 55% compared to the average price during the first half of the year. Prices rose an additional 18% in January 2025 and continued climbing another 9.2% over the last three months.

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Labor costs are another area of concern. In fiscal year 2024, Starbucks reported that increased in-store partner wages and benefits trimmed about 140 basis points off its net operating margin compared to the previous year. That amounts to roughly $83 million, or about 2.15% of its net income.

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Despite wage hikes, many service sector workers have seen their incomes lag behind inflation, according to the Brookings Institution, suggesting that wage pressures may persist. Meanwhile, American consumers are feeling increasingly stretched, making it harder for Starbucks to offset rising costs through higher menu prices. If discretionary consumer spending continues to weaken, Starbucks may be forced to offer more promotions, which would pressure margins even further.

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Turning to the market’s expectations for this week: Options traders are pricing in a significant move for Starbucks stock following the earnings release. The options market is currently implying a move of about $6.50, or over 7% up or down, by the end of the week. This expected move is notably larger than the stock’s long-term average post-earnings moves, which have typically hovered around 4%.

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For traders who are optimistic about Niccol’s turnaround plan but wary of the company’s rising expenses, a more cautious bullish options strategy could be considered. One approach is a month-long call-spread risk reversal.

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This involves purchasing the May 30 at-the-money 84 strike calls while selling the 76/92 strangle to help finance the position. This trade setup offers roughly $8 of potential upside, representing just under 10% of Starbucks' current stock price. The primary downside risk is that traders could end up obligated to buy shares at $76 apiece—about a 9.3% discount from Friday’s closing price of $83.81.

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Historically, a similar options strategy would have been profitable in about 45% of Starbucks’ past 44 earnings reports. It would have lost money around 9% of the time, with a breakeven outcome slightly more than 45% of the time, yielding an average profit of roughly 2.6% relative to the stock price.

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