Decline in Mall Foot Traffic Keeps Starbucks Bearish

Decline in Mall Foot Traffic Keeps Starbucks Bearish

High-end coffee chain Starbucks (NASDAQ: SBUX) reported better than anticipated fiscal 2017 second-quarter results on April 27th. However, the stock crashed to a low of $59, from a high of $61.84, a day earlier. Lower than anticipated revenues, disappointing same store sales growth, and downwardly revised FY17 earnings estimates caused the sell-off. We forecast the underlying bearishness in the stock to continue in the short-term.

The Seattle-based company reported Q2 2017 total revenue of $5.29 billion, compared to $4.99 billion in the second quarter of 2016. Aided by a $53.4 million increase in interest income, Starbucks recorded 2Q17 net income of $652.8 million, or $0.45 per share, up 13.5% from $575.1 million, or $0.39 per share, in 2Q16.

The Street analysts had expected earnings of $0.45 per share on revenues of $5.41 billion.

For the second-quarter in a row, the company missed same-store growth estimates. Starbucks reported same-store sales growth of 3%, versus analysts’ expectation of 4%. In the US, Comp sales increased 3%. The CAP region posted same store sales growth of 3%. In particular, China reported same-store sales growth of 7% due to a 6% increase in transactions.

Citing investments in new roaster stores, and weak results from mall stores (Teavana), the company slashed its FY17 earnings to a range of $2.08 to $2.12 per share, from the prior outlook of $2.12 to $2.14 per share. Starbucks also announced a quarterly dividend of $0.25 per share, payable on May 26th 2017.

The company acknowledged that a decrease in the foot traffic has affected nearly 350 of its Teavana mall stores. The decrease in mall foot traffic is mainly due to the change in customer shopping preferences. As e-commerce companies such as Amazon take a major pie of shopping malls’ business, Starbucks sees a decrease in impulse visits. Thus, lower than anticipated same store sales growth, headwinds faced by Teavana stores, and trimmed FY17 earnings are expected to keep the stock weak in the short-term.

The stock is on a downtrend after failing to break above the resistance level of 60.33. The price also moves along a descending trend line, as shown in the chart below. The weakness in the scrip is also indicated by the declining stochastic oscillator. Thus, we can expect the stock to reach the next major support level of 57.20.

Starbucks - Technical Analysis - 16th May 2017

A put option expiring on or around May 23rd can be purchased on the basis of the forecasted downtrend. The investment in the option should be preferably made when the stock trades near $60 in the NASDAQ. That would increase the probability of success in the suggested trade.

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