New Trade SBUX: Warning, Sirens Beckoning in Starbucks

by Dan June 29, 2012 2:59 pm • Commentary

Here is a quick preview of what I will be discussing on Options Action tonight on CNBC at 5pm eastern:

On the heels (pun intended) of my recent success short in NKE, I want to look for similar situations in the consumer discretionary space, where other growth companies could face similar near term headwinds overseas.

SBUX was one of the first companies to come to mind, when you consider that about 30% of their revenues come from outside North America, and the company’s high 20s PE multiple is largely predicated on growth opportunities overseas.

The chart below shows the high correlation btwn NKE and SBUX over the last year, with both making new all time highs within a month of each other in April/May, only to fall at least 10% from the highs, dramatically under-performing the broader market.

NKE vs SBUX 1 yr from Bloomberg


MY VIEW:  I want to hit on a handful of points that lead me to extrapolate NKE’s problems overseas and their earnings miss to what what we could see out of SBUX when they report their fiscal Q3 earnings on July 26th.

  • When the company reported fiscal Q2 earnings back in late April the company notched their first disappointing comp in years in EMEA (Europe, Middle East & Africa), which is largely Europe.  I would be very surprised if this was a one qtr phenomenon given the string of disappointing economic data out of the region of late.
  • Has held up reasonably well compared to other high valuation consumer discretionary names like LULU, TIF and RL, with the stock trading at about the mid point of the year to date trading range, still up ~15%.  From a pure technical perspective, the fever has broken, and the stock’s under-performance on a risk on day like today with the SPX up over 2% and the stock lagging, it tells me there is fear in investors eyes.
  • SBUX gets over 30% of their revenues from overseas and will rely a good bit on growth, particularly coming from Europe to offset decelerating margins in the core market in the U.S.  Any signs of a sustained slowdown overseas, investors will be forced to second guess the street’s aggressive eps estimates for 2013 calling for 25% growth.
  • Crude oil up 9% today should also worry investors as higher gas prices at the pump could cause some consumers to reconsider $5 lattes on a regular basis.

The stock in my opinion is priced for perfection and I want to play for a re-test of the $45 level, which was significant resistance last year and would also place the stock unchanged on the year.

1 YR SBUX chart from Bloomberg


TRADE: SBUX ($53.10) Bought the Aug 50 / 45 Put Spread for .85
  • Bought 1 Aug 50 Put for 1.30
  • Sold 1 Aug 45 Put at .45

Break-Even on Aug Expiration:

Profits btwn 49.15 and 45, make up to 4.15, max gain of 4.15 at 45 or below.

Losses of up to .85 btwn 49.15 and 50, max loss of .85 at 50 or above.