On December 1st Starbucks (SBUX) announced that founder and long time CEO Howard Schultz would be replaced by then COO Kevin Johnson, and that Schultz would take on an executive chairman role. Investors initially reacted a bit aggressively, sending the shares down close to 10% in the after-market, but after cooler heads prevailed, the stock was higher. Since mid December, the stock has made a series of lower highs and lower lows, which includes its 4% one day post earnings decline on Jan 27th, punctuated by its 4th consecutive U.S. sales comp miss (+3% vs consensus of +4%), its first sub 4% U.S. same store sales decline since Q4 2009.
To my eye the stock was just rejected at the 3 month downtrend, and looks poised to test near term technical support at $54, which is also its post earnings low in early February:
Taking a longer term view though, the stock appears to be nearing a very important technical inflection point, and given the slow down in U.S. sales comps and valuation, the risks could be skewed to the downside during the initial stages of the management transition:
Shares of SBUX trade at 26.6x expected f2017 eps of $2.13, which would be a meaningful downshift in year over year growth to 11% from 21% last year, that would mark its lowest growth rate since 2008. Analysts expect sales to grow 8% year over year, which would be its first annual single digit growth rate since 2011.
There are a couple events in the next could weeks to keep an eye on (per IR website), but the next real catalyst for the stock will be their fiscal Q2 results on April 27th after the close:
Options prices are extremely low from a volatility standpoint, especially looking out to May at around 20 IV, which captures both the annual shareholders meeting and Q2 earnings.
So What’s the Trade?
Owning May puts to play for a move to the downside is already cheap. But by selling March options to finance, it can be even cheaper:
SBUX ($56.75) Buy the March/May 55 put calendar for $1.00
- Sell 1 March 55 put at .20
- Buy 1 May 55 put for 1.20
Gains and Losses on March expiration: the initial trade will make money of the stock goes lower towards the 55 level in the next 2 weeks. If the stock goes higher it will lose money mark to market but the March short puts will expire worthless and help. The ideal scenario is a close near 55 on March expiration at which point the May 55 puts will be both dollar and vol cheap with 2 catalysts to come. Those puts can then be further spread to reduce risk more. The most that can be lost under any scenario is $1.
Rationale – The stock may have just failed at its downtrend and if confirmed could be on its way to support near 54. This trade finances the 55 puts in May with the sale of the same strike in March that only has 2 weeks until expiration. If those do indeed expire worthless the May 55 puts can be turned into a vertical put spread with a very low cost and therefore low risk.