Name That Trade – $SBUX: Over Caffeinated

by Dan July 11, 2014 2:03 pm • Commentary

A couple weeks ago, Enis made a slightly bearish trade in SBUX, playing for the stock to remain in its current range heading into July expiration (below).  The trade is a slight loser with one week to expiration, and the profit potential now depends on the stock’s ability to stay below $78 as the deltas are almost entirely now in the 80 puts.  We are keeping a close eye on it, and will keep on a short leash, but as the company’s fiscal Q3 earnings approach on July 24th, we are looking to roll the bearish view and will likely do so next week.

In the meantime I wanted to make a little bit of a score card for the week as it relates to consumer and retail related news:


-Costco (COST) reported June Same Store Sales that were slightly ahead of estimates, helping the stock rise 1% on the week, despite still being down 1% on the year.

The BAD:

-Family Dollar (FDO) missed fiscal Q3 results and guided the year down and the stock is down 5% on the week, filling in most of the gap since Carl Icahn’s announcement of his stake a few weeks back.

-Walmart’s CEO of the US had some downbeat commentary on their customers as it relates to the supposed improvement in the labor market – “it’s really hard to see in our business today … that it’s gotten any better”.

-Fed Minutes reveal concerns over softness in housing


-Lumber Liquidators (LL) pre-announced worse than expected Q2 results, the stock got trounced, down 28% on the week to new two year lows.

-The Container Store (TCS) reported worse than expected fiscal Q1 results and the stock is down 10% on the week to new all time lows.

-PotBelly (PBPB), the sandwich chain pre-announced worse than expected Q2 results and the stock is down 27% to new all time lows.

So the clear read of this is that the U.S. consumer, despite improving employment remains strained.  While there have been no shortage of single stock blow ups in consumer and retail in 2014 (BBY, BBBY, GME, LULU, LL, SODA, PNRA, COH…to name a few) many have been thought of as “one off” events, or “stock specific” but it is hard not to think of this price action as a growing trend.  Aside from the high profile blow ups, there has been some serious slow grinds lower from recent all time highs in many other names, like  COST, WMT, TGT, PNRA, RL, TJX and DNKN.  There are ovbiously a few that have performed well, but I would say those are more the outliers (UA, GMCR, M & NKE).

The price action this week in the S&P Retail ETF (XRT) down 3.5%, from very near the 2014 highs should in this trader’s opinion be getting a tad more focus than it is.  It is likely the sort of thing we will look back on and ask ourselves how did we miss it??

With all of this in mind, SBUX still gets 70% of its revenues from the U.S., even as its international business has been a main growth area. U.S. consumers have remained loyal to SBUX even as other retailers have struggled, but the stock’s exceptional valuation (32x P/E), especially for a $60 billion market cap company, reflects much of that loyalty relative to the industry.  Much of the good news is priced into the stock at that valuation, especially given the otherwise relatively weak retail backdrop.

In the past 3 quarters, SBUX has beaten expectations each time, but the stock has only risen an average of 1% after those results.  That price action is evidence that investors are less willing to pay up for SBUX at this valuation.  That valuation stall is a risk if SBUX results are not quite up to par, or the broader market comes under pressure.

As we get closer to SBUX’s earnings, and we have a better sense for how our existing trade is shaking out we will look to roll this bearish view in front of the print.  If the stock is right about here closer to next week expiration, this is the trade that I would choose:  

HYPOTHETICAL TRADE: SBUX ($78.50) Buy August 77.50 / 72.50 Put Spread for 1.25

-Buy Aug 77.50 put for 1.65

-Sell Aug 72.50 put at .40

Break-Even on Aug Expiration:

Profits: btwn 76.25 and 72.50 make up to 3.75, with max gain of 3.75 below 72.50, down 7.5%

Losses: up to 1.30 bwtn 76.25 and 77.50, with max loss of 1.25 above 77.50   

Rationale:  SBUX at almost 30x earnings is priced to perfection, the stock’s 10% rally since late may should discount a bit of good news, but also raises expectations heading into the print.

From a technical standpoint the stock just got rejected at the breakdown level from December, just below $80, a reasonable first target on the downside would be inline with the implied move of about $3.25 on earnings, or right in the middle of the spread detailed above.

SBUX 1yr chart from Bloomberg
SBUX 1yr chart from Bloomberg

Implied vol has recently bounced from multi-year lows, but if recent history is a guide, options prices are likely to rise another 25% prior to the print.  So while options are still relatively cheap, one would want to spread directional bets as vol will come in hard after the event:

SBUX 1yr chart of 30 day at the money IV from Bloomberg
SBUX 1yr chart of 30 day at the money IV from Bloomberg


We will take a closer look at trade entry next week.





Original Post June 19th, 2014:  New Trade – $SBUX: Triple Shot Toppe?

Starbucks is trading at a 3 month high today after an upgrade from UBS.  The UBS analyst cited the following factors for the upgrade:

  • One of best long-term global growth opportunities among consumer multinationals given good sales growth, earnings visibility, and optionality around out-year initiatives
  • FY2015 consensus estimates now reflect higher coffee costs; more recent pullback in coffee may mitigate some fears for full year impact

The stock’s move today is likely catch up to the rest of the market, since the UBS analyst hardly noted any factors that were not already well known by Starbucks investors.  Even with today’s move, SBUX is still down 1.5% on the year.  

One subscriber asked us about a potential 80/75/70 put fly in SBUX this afternoon, and taking a closer look, the chart certainly suggests that SBUX will have a tough time breaking either $80 to the upside or $70 to the downside without a significant stock-specific catalyst:

[caption id="attachment_41958" align="alignnone" width="600"]SBUX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg SBUX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

Moreover, the fact that the stock is still negative on the year makes me think that the stock is more likely to hang around $75 rather than $80, especially since there is no catalyst in the name until earnings in late July.

So a rangebound trade is our natural inclination given the technical setup and a quiet market.  The only drawback is that implied volatility in SBUX is at a 2 year low:

[caption id="attachment_41959" align="alignnone" width="600"]SBUX 30 day implied volatility, Courtesy of Bloomberg SBUX 30 day implied volatility, Courtesy of Bloomberg[/caption]

This situation looks quite similar to the one in Mastercard, where we executed an in-the-money put fly last week in this post.  In a quiet market, even though implied volatility is low, the rangebound trades often work well if there is no idiosyncratic news.

With SBUX, we’re going to enter a similar position, looking for continued trading between 72 and 78 over the next month:

TRADE:  SBUX ($77.09) Bought Jul19th 80/75/70 Put Butterfly for $2.15

-Bought 1 Jul19th 80 Put for 3.26

-Sold 2 Jul19th 75 Puts at 0.60 each or 1.20 total

-Bought 1 Jul19th 70 Put for 0.09

Break-Even on Jul19th Expiration:

Profits: btwn 72.15 and 77.85 make up to 2.90 with max gain of 2.90 at $75

Losses: btwn 70 & 72.15 lose up to 2.15, btwn 77.85 & 80 lose up to 2.15, below 70 and above 80 lose full 2.15.

Rationale:  Once again, this trade is more a decay trade than a directional position, though it will do better if SBUX moves towards $75 rather than towards $80 over the next couple of weeks.  If SBUX gets above $80 or below $70, we’ll likely take a loss on the position, but plan to hold on to it through the July 4th holiday otherwise.