EOT Trade Alert – November 24, 2009

Corey Williams | November 24, 2009

November 24, 2009

Trade Alert:

Buy SBUX Apr 2010 $22 Calls at $1.80 or better (SSUDV)

Company Background:

Starbucks (SBUX) doesn’t need much of an introduction – you probably drive by at least one store on a daily basis. The original espresso style coffee niche operator sells and distributes everything coffee. They’re primarily a retailer but they’ve expanded their business to include wholesale and trademark licensing.

Short-Term Catalyst:

Starbucks was one of the great growth stories of the late ’90s and early 2000s. But the growth came at a price. Certain US and international markets were oversaturated with retail stores.

I recall sitting on the patio of one Starbucks enjoying an Americano while looking at another competing Starbucks across the street…

Quality and service suffered as the company continued to push fast paced growth. Eventually the problems hit the bottom line as costs spiraled out of control and customers defected to competitors.

Over the last 18 months, the company has undergone a major facelift.

Management has closed 800 US based stores and another 100 internationally. (No more sitting at one store and looking at another one across the street!) They’ve also made store changes improving the customer’s experience.

Now, Starbucks is operating more efficiently – costs are down, customer traffic is up, and profit margins are expanding.

With an efficient business model in place, management plans to start growing again in 2010. Currently they plan to open 300 new stores worldwide. It isn’t going to be the same haphazard growth of years gone by. It will be disciplined and profitable growth.

The bottom line is the problems plaguing the company are fixed. Customers are returning and macro trends in consumer spending are improving. The holiday season should be better than expected. And, the accelerating earnings growth in 2010 should send the shares higher over the next few months.

Trade Details:

Option Ticker Symbol:	SSUDV
Underlying Stock Symbol:	SBUX
Current Bid-Ask Price:	$1.54 – $1.59
Option “Buy Up To” Price:	$1.80
Break-Even On Stock At Expiration:	$23.80
Maximum Risk Per Contract:	$180

Exit Strategy:

SBUX is trading at $21.16 per share. Resistance levels will be at $23.50 and again at $26. Remember, we want this stock to move higher. Support levels will be at $18.50 and $17. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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