I have a confession to make. I used to be a Starbucks addict.
A few years ago, I was never without my venti iced non-fat 16-pump chai tea latte with extra extra ice. The baristas at my local store knew me by name and even went so far as to ask if I was ok if I showed up late or if I showed up more than twice a day. They even followed my dog on Instagram.
I was addicted to a point that when there was a forest fire one summer that stopped my preferred Starbucks store from getting its chai concentrate delivered, I went online and bought all of the chai concentrate I could afford from starbucks.com with delivery by next day air.
I was so addicted that I didn’t leave for a trip without mapping out the nearest Starbucks locations to wherever I was staying when I got to my destination.
I was so addicted that, for a few years of my life, there are almost no pictures of me without a big Starbucks cup in my hand.
But on August 17, 2015, I decided enough was enough.
I was sick of never being able to be without that drink in my hand or on my desk at all times or in my car’s cupholder. I was sick of spending the money. I was sick of the headaches I got when I didn’t have enough sugar and caffeine in my system. So, I quit. Cold turkey.
I deleted my Starbucks app that I had used twice a day everyday for as long as it had been available. I even got rid of my giant reusable Starbucks cups that I dutifully washed after every use.
And I haven’t been back since. I’m now one of those obnoxious people that only drinks water, and plenty of it.
But since I’m nearing my anniversary of breaking up with Starbucks, I got a little curious and decided to take a look at the company’s stock (NASDAQ: SBUX).
I had read last week that SBUX’s Teavana stores had been the latest mall casualty and that they would be closing all 379 stores. I also read that shares slid 8.6% last Friday alone after revenue came in at $5.66 billion, somewhat below the $5.76 billion that analysts had expected.
In their latest earnings report, growth was still solid. Sales were up 8% year-over-year, with same-store sales increasing markedly as well as growth from new stores in both domestic and international markets.
However, that same-store growth domestically wasn’t exactly driven by new traffic. Sales growth was instead driven by an average 5% increase per ticket implying that the real growth came from increases in pricing.
As someone who used to be a devoted Starbucks regular, I can tell you first hand that the company is in a unique position where noticeable increases in pricing don’t scare customers away. In fact, it never bothered me when my venti iced non-fat 16-pump chai tea latte with extra extra ice went up in price. Why? Because I was an addict and they were the dealer. And clearly there are others out there who are very much like my former self.
This got me thinking though. Up until two years ago, SBUX was a growth stock. Since then, it has bounced between the low $50s and the low $60s. As inspiring as 8% sales growth in the food and beverage industry sounds, it isn’t all that exciting when that growth isn’t driven by new traffic, and therein is where I think the problem lies with SBUX.
Domestically, we are saturated with Starbucks, it is everywhere. There are standalone stores, stores within grocery stores and Super Targets, bags of Starbucks coffee beans and boxes of Starbucks Via instant coffee packets take up multiple shelves in every grocer’s coffee and tea aisle.
And traffic and sales volume are steady. Thus the growth now is coming from those price increases, which to me is a problem because I have to wonder, they can’t increase prices every quarter forever, can they?
The hope for growth with Starbucks is in international markets. Namely, China.
Starbucks operates around 2,800 stores in 130 cities in China, with Shanghai having 600 cafes, which is roughly double the number of stores in New York City. The company plans to have 5,000 stores in the country by 2021.
And the company’s strategy in the People’s Republic has paid off. For the second year in a row, same-store sales in China grew 7%, and the bulk of that can be attributed to new traffic. Not only that, but the company has seen an increase in revenue of 22% year-over-year in China, and a 9% increase in operating income.
But as exciting as those numbers are, don’t buy Starbucks now. The dip in the stock last Friday may look like a buying opportunity, but there’s something going on technically that says that this isn’t a good buy yet.
Last week, a breakaway gap formed. A breakaway gap represents a gap in the movement of a stock price supported by high levels of volume, which you can see along the bottom of the chart above.
When the direction of a breakaway gap is down, it marks the beginning of a bearish move. Breakaway gaps occur after a consolidation pattern, which we can see with SBUX, moving the price from a non-trending pattern into a trending one, in this case, that means down.
Now, a strong breakaway gap like the one we’re looking at with SBUX is considered to be much stronger than a non-gap move out of a period of consolidation as it indicates a shift in sentiment in the direction of the gap that will likely last for a while, leading to an extended move.
To measure the move down we’d need a measuring gap, which has not yet formed. Measuring gaps typically form in the middle of the move, and you can measure from the measuring gap to the breakaway gap and then add that to the bottom of the measuring gap to get a target price for the move.
However, in SBUX case, I think we could see the price falling to $41 – $34, and here’s why.
The chart above is the monthly chart for SBUX, and the retracement levels I’ve identified are for the bull run up from 2009 to 2015. From this perspective, it’s clear that SBUX has been in a consolidation range since the top in 2015, which makes me think the breakaway gap we can see on the daily chart is a very significant move and should thus result in an extended move down.
Now, this is all a roundabout way of saying that the gap down in price doesn’t make for a good buying opportunity yet, and it makes sense to wait until the $41 or $34 level if you’re interested in investing in the company. However, just because SBUX is moving down doesn’t mean you you can’t make some money. If you’re an aggressive trader, you could short SBUX or buy put options with the expectation that the downtrend could continue.
Once the price does fall to better buying levels, SBUX may make a good long term investment for at least as long as the world has Starbucks addicts.