Bears shopping at discount retailers following weak holiday

Discount retailers are known for bargain prices, yet some traders think their shares are too expensive.

The broader industry is already coming off a weak holiday season as shoppers flocked to the online merchants.1 Now investors are bracing for closures and widening bets against traditional brick and mortar retailers.

At least three large option transactions yesterday looked for stocks in the sector to stall or push lower:

  • The first was detected in Dollar Tree (NASDAQ: DLTR), with 5,900 March 75 calls sold for $0.60. Calls are contracts to buy a security, which makes them bullish when they’re bought but bearish/neutral when they’re sold. Monday’s trader will keep the $0.60 as their only reward and face the potential for huge losses on a rally above $75 by the expiration the end of this week. 
  • Rival Dollar General (NYSE: DG) followed less than an hour later when 2,500 March 75 puts (options to sell a security) were sold for $4 and an equal number of March 71 puts were bought for $1.70. It appears a winning downside position was exited and rolled to the lower strike. They recovered $2.30 of their capital and need the shares to close below $69.30 or will lose money. Quarterly results are due Thursday morning, so a poor set of numbers could deliver the potential catalyst. DG fell 0.43 percent to $72.58 and DLTR slid 0.64 percent to $74.58. Both companies have lost more than one-quarter of their value after hitting all-time highs last summer. Meanwhile, the broader S&P 500 is less than 2 percent from record levels.
  • Monday’s third downside play appeared in SuperValu (NYSE: SVU), a junk-rated grocery chain whose debt load is more than 40 times its cash reserves. This time over 14,000 January 3 puts were bought for $0.75, as the trader looked for further declines in the stock price. SVU edged down 0.60 percent to $3.29 and must drop another 32 percent by January 2018 for the puts to make money.
KO vs PEP, 5yr chart

Source: OptionsHouse by E*TRADE

Investors have known for months that major firms including J.C. Penney (NYSE: JCP), Office Depot (NYSE: ODP) and Macy’s (NYSE: M) planned to close hundreds of stores, and the news flow has stayed negative more recently. A report from Thomson Reuters, for instance, revealed that two-thirds of companies missed comparable-sales targets during the key November-January quarter.2 The Wall Street Journal also wrote about greater short interest (bets against) on real-estate investment trusts that own shopping centers.3

Bottom line: Economic sentiment and employment are running high but the rising tide doesn’t lift all ships. Fundamentals still matter, and the bears see more problems for brick-and-mortar retailers in coming weeks and months. 

1. Apparel sales growth struggles to climb above 3% says NPD. 3/6/17

2. Thomson Reuters: Q4 2016 Retail Earnings Update and Same Store Sales Report. 3/6/17

3. Wall Street Journal: Short Sellers Target Mall REITs. 3/7/17