More bears crowd in to the retail space

While the S&P 500 continues to push new highs, the retail sector has been left out in the cold.

Jobs are increasingly plentiful, inflation is low, and measures of business confidence are running at their best levels in years.1 While typically that would help consumer stocks, traditional store-based retailers have struggled as shoppers migrate to the Internet. This is a song we’ve heard before this week, as bears moved into some discounters this Monday.    

L Brands (NYSE: LB) has been hit especially hard from the trend, having lost about half its value since the start of last year. On Thursday, traders positioned for further downside by purchasing 10,000 August 45 puts (options to sell a security), most of which priced for $2.25. 

The contracts will gain in value if the parent of Victoria’s Secret and Bath & Body Works declines into the summer. They will leverage a 20 percent slide in the share price to a profit of more than 300 percent, but become worthless if the shares hold their ground or bounce north.

LB slid 1.40 percent to $49.97 yesterday, and is one of the few S&P 500 companies to have made new 52-week lows in the past month. Other stocks in this boat include retail-related names like big-box merchant Target (NYSE: TGT), supermarket chain Kroger (NYSE: KR), and shopping-center operator Simon Property (NYSE: SPG).

L Brands (LB)

Source: OptionsHouse by E*TRADE

Aside from the broader industry trends, shifting consumer preferences and competition from lower-priced items have punished LB. Management has responded by halting growth plans and remodeling some of its locations.2

Thursday’s puts are noteworthy because their August expiration will cover two quarterly reports and five monthly sales announcements. Some traders may be expecting further negative surprises amid those headlines. 

Puts outnumbered calls in LB by a 7-to-1 ratio yesterday, an indication of the sharply bearish tone. Overall volume was several times above the monthly average.

In summary, LB has struggled despite the bull market in most stocks, and one big trader is positioning for further downside into the summer.

1. National Federation of Independent Businesses. Small Business Economic Trends. February 2017. Go-go economy? 33 of 36 major U.S. industries growing, ISM surveys show. 3/3/17

2. Bank of America Merrill Lynch. Cutting estimates; guidance surprisingly low, still implies a nice pick-up in trends. 2/23/17.