Starbucks (SBUX) – Bean Counting

by riskreversal November 18, 2016 12:32 pm • Trade Ideas

On November 3rd, Starbucks (SBUX) issued fQ4 results that were better than expected, despite U.S. same-store sales missing expectations for the fourth consecutive quarter (4% vs 4.8%), with CEO Howard Schultz citing a “high degree of uncertainty” prior to the U.S. presidential election. Management issued fQ1 guidance that was below consensus, they guided f2017 eps to grow at 12% yoy, the lowest growth rate in 5 years, and a material drop from 21% growth in f2016, with sales expected to grow at 9% yoy, the first single digit growth since 2011.

To be fair, much of the company’s expected growth will come overseas, with same-store sales in China at 6%, breaking a string of misses, with Schultz’s declaring on the conference call that they are “doubling down on China”, per WSJ, “planning to increase the chain’s stores in China from the current 2,300 to 5,000 by 2021”.  For instance, “sales increased 29% yoy in Q4 in China/Asia Pacific segment, but the increase was primarily  by incremental revenues from 981 net new store openings over the past 12 months”.

The issue here is that the Americas still counts for 70% of SBUX’s sales, which appear to be stagnant and uncertain, while China/Asia Pacific accounted for 15% of sales in f2016, with same store sales only growing 1 point above the company’s world wide target of about 5%.

I’d also add that since the company guided for the current quarter, the US dollar Index (DXY) has rallied 4%, which could be a massive headwind to the company’s almost 30% sales that come from overseas, but more importantly where they are expected to get their growth.

The stock’s 10% bounce from its post earnings lows may present an attractive defined risk short opportunity. SBUX trades on a P/E basis at 2x its expected eps growth rate for fiscal 2017, PE/G of about 2. This is very near an all time high. Something has to give, either growth estimates expand, or stock gets re-rated in new year.

The one year chart of SBUX’s shows the stock’s year to date under-performance, down 8% one tear and down about 125 from its 52 week highs made last December. The stock nearly touched its 200 day moving average this morning, a level that it failed at in July and then again in August as it made a series of lower highs:

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

The stock has decent near term support near $52.50, which might be an attractive near term downside target.

Short dated options prices are quickly approaching the 52 week lows with 30 day at the money implied volatility near 15% (blue line below), while 30 day realized volatility (how much the stock is moving, white line below) having picked up of late and in line with IV, making long premium directional trades attractive for those with a convicted view:

From Bloomberg
From Bloomberg

 

So What’s the Trade(s)?  

There are two trade ideas we want to detail, one setting up for the next identifiable catalyst, fiscal Q1 earnings on Jan 26th. And one playing for a breakdown to last month lows in January. Next week February options will be listed which gives a bit more flexibility for those looking to isolate the event. But given the support level identified at $52.50, a put calendar may make sense targeting that level for a breakdown:

First: SBUX ($55.50) Buy Jan / Apr 52.50 put calendar for $1.10
  • Sell 1 Jan 52.50 put at 65
  • Buy 1 Apr 52.50 put for 1.75

Rationale – The Jan puts expire before the company reports on Jan 26th. This trade works great if the stock fails at resistance here and approaches that 52.50 level into the New Year, with the ideal scenario being right at that level on Jan expiration. The calendar is only short about 8 deltas, so the biggest factor near term is the Jan puts decaying at a faster rate than the Aprils. If the stock were to breakout above resistance here the trade can be closed for a small loss. If it stays in this range or drifts lower it will be in an ideal position to capture the late Jan earnings event.

Or for those who think expensive growth stocks get hit right out of the gate in 2017:

Second: SBUX ($55.50) Buy Jan 55 / 50  put spread for $1
  • Buy 1 Jan 55 put for 1.35
  • Sell 1 Jan 50 put at .35

Break-even on Jan expiration:

Profits: up to 4 between 54 and 50 with max gain of 4 at or below 50

Losses: up to 1 between 54 and 55, max loss of 1 or 2% above 55.

Rationale – This is a simple risk 1 to make 4. It will do particularly well if the stock fails here at resistance and if there is some early January selling as we’ve seen in recent years this will be well positioned. Obviously on a breakout of trend to the upside this would have to be managed with a 50% stop loss of premium paid.