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Sep 22, 2017

S3 Analytics: Starbucks Tops Chipotle as Largest Restaurant Short

Diners usually have their coffee after their meal but over the last month, short sellers have put specialty coffee retailer Starbucks Corp. (SBUX) ahead of Chipotle Mexican Grill Inc. (CMG). Starbucks is now the largest short in the Restaurant Sector with $1.6 billion of short interest, an increase of $754 million over the last month, which was a 94% increase in SBUX short interest while the overall Restaurant Sector increased by only 8%. For the year, SBUX short interest increased by $833 million, or 115%, while short interest in the Restaurant Sector increased by only 10%.

Chipotle Mexican Grill (CMG) has been a favorite of short sellers ever since its first food poisoning scare in 2015, resulting in short interest spiking to $1.5 billion and peaking in November of 2016 at $2.3 billion. Shorts have reduced their Chipotle short exposure in 2017 even though its stock price is down $16.4% for the year. Short interest has steadily declined throughout the year and is now $1.5 billion.

From 2010-2016 Starbuck’s short interest had been relatively small compared to its market cap, averaging $598 million as Starbuck’s stock price appreciated by 377%. But this year, as Starbuck’s stock price is underperforming the S&P with a negative return of -0.92%, short interest has increased by $833 million, or 115%.

Starbuck’s revenues had been growing at double digit rates since 2012, but growth has slowed to 6% in 2017 as the company has had difficulty increasing same store customer growth. Comparable same store sales in the U.S., its biggest market, has flat-lined. Food sales, which were supposed to increase margins per customer visit, have been disappointing. Starbucks is now looking towards the specialty premium coffee niche to increase the “average spend” per customer visit but competition from Lavazza, Nestle and non-chain coffee houses may prove this to be a more difficult road to take than initially expected.  

This year’s significant increase in Starbuck’s short interest is an clear sign that traders are not only skeptical about the firm’s short term profitability and growth, but are willing to bet heavily that Starbuck’s will underperform the rest of the Restaurant Sector. With three-quarters of a billion dollars worth of new short exposure hitting the tape over the last month, it looks like they expect the underperformance to happen sooner rather than later, snubbing both the Maple Pecan and Pumpkin Spice latte’s effect on Starbuck’s bottom line.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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