Here's How Long I Will Stay Short Starbucks
Amid new leadership and global stimulus, the coffee chain could experience a turnaround in the near future.
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The news was announced in mid-August: Now-former Chipotle Mexican Grill CMG chairman and CEO Brian Niccol would take on those same positions at beleaguered coffee chain Starbucks SBUX.
The Starbucks CEO at the time was Laxman Narasimhan, who has stepped down from that role and also as a member of the board. Niccol, who also sits on the board at Walmart WMT, had worked wonders at CMG and guided that firm after it had a couple of food safety scares years ago, to the quality fast-food chain it became. He'll be tasked with returning Starbucks to glory after a tough period.
Day one at the new job for Niccol was September 9. By September 17, the firm's CEO for North America, Michael Conway, suddenly decided to retire after eleven years at Starbucks. Niccol had sent a letter to all employees upon taking the job: "We're getting back to Starbucks." By that he meant that he wants the chain's coffee houses to welcome the public, to be where people can gather and to sell high-quality coffee served by skilled baristas.
Niccol told employees that, for his first 100 days at the helm, he would be spending time in the stores and in support centers. He wants baristas at the store level to feel empowered to take care of customers and to re-establish Starbucks in communities wherever that connection had been lost.
Oh, by the way, Conway may have "decided" to retire, but his position will not be filled. North American retail operations head, Sarah Trilling, is reporting directly to Niccol with no one in the middle.
Getting Started
By last week, Niccol realized that he was going to have to play ball with the idea of working with unionized labor. Niccol, again, wrote to his employees that he was committed to engaging in a positive discussion with Workers United, should his labor choose to be represented by an organized labor union. At that time, the union represented more than 10,500 Starbucks employees at more than 490 stores. By this Wednesday, Workers United announced that it had won union approval at its 500th Starbucks U.S. store (out of 16,621 stores).
Roughly 97% of Starbucks U.S. stores have opted not to unionize or have not yet voted on unionization.
Analysts
Andy Barish, a five-star rated analyst at Jefferies, downgraded Starbucks shortly after Niccol took over to a "sell" while taking his target price down to $76 from $80.
Barish, who had not had a "sell" rating on SBUX in 13 years, pointed out that the firm's problems won't be quickly corrected juts by bringing in a well-liked CEO with a solid reputation, though he did allow that the transition from Narasimhan to Niccol was, for the firm, a "much-needed jolt."
Since Barish downgraded the stock, five-star analysts from Robert W. Baird, JP Morgan and Deutsche Bank have all reiterated "buy" or buy-equivalent holdings and, after allowing for changes, target prices between $115 and $118. The most recent of those was Lauren Silberman of Deutsche Bank who, on Wednesday, wrote that she expects that, through Niccol's leadership, Starbucks will reinvigorate the brand and its appeal to a broader base of consumers.
Expansion
On Thursday, Starbucks announced the expansion of the firm's collaborative coffee innovation network with the additions of new farms located in Guatemala and Costa Rica. The firm also says that it plans to expand its investments in both Africa and Asia as well. The firm currently works with more than 450,000 farms globally.
Earnings
Starbucks is expected to report the firm's fiscal fourth quarter towards the end of October.
Right now, Wall Street is looking for a GAAP EPS of $1.04 on revenue of $9.4 billion. These numbers would show an earnings decline of 2% on just a smidge of revenue growth. It won't be about these results anyway, as far as the stock's performance is concerned. It will be based on guidance and on how good of a job Niccol can do as the face of the firm and as its chief salesperson. We all know that this need matches up with his skillset perfectly.
The Chart
I'll tell readers flat out that I am short this name, but also that I do think the leadership of Niccol is going to make a difference. I also think that much easier monetary and fiscal policies in China will help out a firm like Starbucks. The chain has more than 7,000 outlets in China.
Readers can easily see the technical reason for my short position. I initiated the short last Friday when I was playing backup quarterback to Dougie Kass in his Daily Diary, based on this chart. The triple-top pattern of bearish reversal that came after the August gap that remains unfilled tells a fairly compelling story.
That said, I'm not a dummy, or at least that's what my mom told me when I was a kid. The stock experienced a "golden cross" about a week and half ago and is trading higher now than it was then. I am still up on this trade, but it's not a home run or even a double, and there is risk associated with staying short into those earnings. It sure would help it SBUX could lose the 21-day EMA and shake out some swing traders.
My utopian target price for the short would be any price within that gap (below $90.30) ahead of earnings. My panic point? The apex of the third top was $99.20. So, yep, a new post-Niccol high would be enough to shake me out.
At the time of publication, Guilfoyle was short SBUX equity.
