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Feb 7, 2019

S3 Analytics: Starbucks: Shorts are in, Baristas & Democrats are out

The former CEO of Starbucks Corp, Howard Schultz, declared the possibility of a presidential run as an Independent in a recent 60 Minutes interview which drew the ire of Democrats who fear he would cannibalize votes from their ticket. Schultz was recently heckled at a New York City book event; coffee drinkers began threatening to boycott Starbucks and baristas are considering taking off their aprons, putting down their tamps and walking away from their steam wands. But even with all this commotion, SBUX stock managed to gain 1.14% over the last week.

While coffee drinkers and baristas contemplated their future actions, short sellers acted quickly with SBUX shares shorted increasing by 2.5 million shares, +6.78%, over the last week. SBUX short interest is now $2.7 billion; 39.21 million shares shorted; 3.26% of the float with a 30 bp fee stock borrow cost.

SBUX continues to be most shorted stock in the Restaurant Sector and had the largest increase in short interest in the sector over the last week and made up almost half the total increase of short interest in the sector. Shorting the Restaurant Sector has not been a profitable endeavor in 2019, the $12.7 billion worth of shorts are down $1.02 billion, -8.28%, in mark-to-market losses year-to-date with SBUX short sellers the second most unprofitable short behind Chipotle Mexican Grill Inc (CMG) with $167 million of mark-to-market losses this year.

We are seeing continued active short selling activity today in response to the Schultz announcement, but short sellers have more fundamental reasons to hold onto or increase their positions. Specifically, same store sales growth has been lagging and the enormous size of the company and number of stores coupled with maturation and saturation of the product makes exceeding analysts’ growth and revenue targets a difficult task. Increased stock buybacks and dividend growth are an attractive carrot for long shareholders, but unless international growth kicks into high gear Starbuck’s valuation relative to its sector brethren may seem like paying Venti prices for a Grande product.

Want deeper insight into the above analysis?
Contact:  Ihor.Dusaniwsky@S3Partners.net
                 Managing Director Predictive Analytics, S3 Partners, LLC

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