New Trade $SBUX: Butterflies and Mermaids, Sounds Sweet

by Dan November 1, 2012 3:35 pm • Commentary

After taking a long hard look at SBUX into tonight’s print, I come to the conclusion that it is kind of hard to press the short given the current set up.  While some of the competitive data points from CMG and MCD suggest otherwise, it won’t take much for the stock to bounce off of $45.  I am by no means bullish on the story, as the company faces many headwinds fighting off decelerating growth in North America, and international expansion that looks increasingly challenged due to sagging global growth.  The trade that I am going to lay out below is not an “earnings trade” per se, but more one of sentiment.  

TRADE: SBUX ($46.40 )  Bought the Jan2013 50/55/60 Call Butterfly for .57

-Bought 1 Jan13 50 Call for .99

-Sold 2 Jan13 55 calls at .24 for a total of .48

-Bought 1 Jan13 60 call for .06

Break-Even on Jan13 expiration.

-Profits of up to 4.43 btwn 50.57 and 60, max gain at 55 of 4.43.

-Losses of up to .57 btwn 50 and 50.57 and btwn 59.43 and 60, with max loss of up to .57


Trade Rationale:  If a rally in Starbucks were to happen over the next few months it would likely find resistance in the low 50’s. A 1×2 structure takes advantage of this scenario by playing for the move above 50, but selling above resistance enough premium to offset the much of the premium in the 50’s. The 1×2 can be turned into a butterfly by buying the 60’s if margins are an issue. This 60 call does little for protection as we don’t expect SBUX stock to go parabolic, but it’s not much to worry about from a dollar cheap perspective to alleviate any margin issue





Original Post Nov 1, 2012:  SBUX FQ4 Earnings Preview 

Event:  SBUX reports fiscal Q4 earnings tonight after the close, the options market is implying about a 5.3% move on earnings* vs the 4 qtr avg move of about 5.6%.

*the Nov 2nd weekly 46.50 straddle is offered at ~2.50 vs stock at 46.35, if you bought that you would need a 2.50 move from $46.50 by tomorrow’s close to break-even, or about 5.3%

Sentiment:  Wall Street analysts remain fairly bullish on the stock withh 22 Buys, 9 Holds and only 1 Sell, with an avg 12 month price target of about $58.  Short interest sits at about the low of the 3 month range, just above 1%.

Fundamentals:  When the company disappointed in July, and guided down for Q3, they cited a weak consumer demand environment and unfavorable input costs.  Given the recent commentary from the likes of CMG and MCD, it is unlikely that SBUX will see much relief on this front.  Given SBUX’s concentration of stores on the East Coast, guidance will likely see a hit, or at least be a reason for caution as investors expect some insight into fiscal Q1 and 2013.

Valuation:  SBUX trades at about 22x next year’s expected earnings which are expected to grow at ~20%,  while sales are expected to decelerate a tad.

Technicals:  SBUX’s chart looks broken to me, while it is has held the uptrend from the double bottom low in 2011, the stock is in a fairly steep downtrend from the blow off all time high made back in April.  The wedge that has been forming is likely to be resolved one way or the other, and soon, with $50 serving as some heft resistance to the upside.

[caption id="attachment_18885" align="aligncenter" width="490" caption="SBUX 1 yr chart from Bloomberg"][/caption]

Volatility:  Implied Vol is bid up to the high 30s in front of the print, vs the 30 day and 60 day realized vol of 23.5 and 21.50 respectively.  Post earnings implieds should comedown to low 20s depending on the magnitude of the move.

[caption id="attachment_18878" align="aligncenter" width="490" caption="SBUX 30 day atm IV vs Realized from Bloomberg"][/caption]


MY VIEW:  this is a tough press here on the short side as there is a bit of bad news in the stock.  If the company is able to meet already lowered Q4 guidance and not lower fiscal 2013 estimates much below consensus, the stock probably sees a bit of a relief rally, with $50 likely strong resistance.  On the flip-side, 2 consecutive misses and guide downs, the stock will have another gap, much like CMG 2 weeks ago, and possibly to the low $40s.

I am looking at a few different trades, but no matter what I do I will likely sell Nov2nd weeklies that expire tomorrow and buy something longer dated…..If I find anything compelling I will surely be back.


Expectations-Bloomberg Preview:

* 4Q adj. EPS est. 45c (range 44c-47c)
* 4Q rev. est. $3.39b (range $3.31b-$3.5b)
* NOTE: SBUX in July saw 4Q EPS 4c-45c, sales up 10%-12% implying $3.34b-$3.40b
* 4Q global comp. sales est. up 5% (Consensus Metrix avg. of 25)
* Americas comps. est. up 5.1%
* EMEA comps. est. up 0.6%
* China & Asia Pacific comps. est. up 11%

* Comp. sales likely to stabilize after slowing in 3Q: Barclays
* SBUX focusing on driving traffic to stores, incl. ’Treat Receipt’ discount in Aug., reward programs: Jefferies
* Watch comments on commodity costs; SBUX in July said coffee costs will be tailwind in FY2013, saw dairy costs higher
* SBUX will probably reiterate FY2013 forecast, may narrow EPS view, particularly at top end: RBC
* SBUX in July saw FY2013 EPS $2.04-$2.14, est. $2.13; saw rev. growth 10%-13%, est. $14.86b implies growth 12% over FY2012 est. $13.32b
* Saw opening 1,200 net new stores, incl. 600 in Americas, 500 in China, Asia Pacific and 100 in EMEA
* Watch comments on single-serving products, incl. K-Cups, SBUX’s own Verismo brewer
* NOTE Sept. 19: Starbucks Sells Own Brewer at Discount to Green Mountain Model
* May comment on U.K. tax dispute; NOTE Oct. 24: Starbucks Says 20% of All U.K. Stores Are Unprofitable
* NOTE: SBUX in July said it may see charges in 4Q on store closings

* SBUX missed EPS, rev. ests. in 3Q, beat ests. in prior 7 qtrs
* Implied 1-day move based on options 6%: Bloomberg data
* Trades at 10-DMA $46.12, below 25-DMA ($47.75), 50-DMA ($48.86)
* SBUX up 0.3% YTD vs DNKN up 24%, PEET up 17%, MCD down 14%, GMCR down 42%

TIMING: SBUX reports 4Q ~4:03pm today, call 5pm 877-491-7022 pw