Survival of the fittest in retail ecosystem
08/10/17

Traders are looking for a survival of the fittest in the retail ecosystem.

After all, last holiday season was like a meteor hitting the sector. Almost every merchant staggered from the impact, and weaker species quickly went extinct. Like dinosaurs scrounging for food in a dust cloud, retail survivors have been starved of foot traffic and devoured by cyber-predators.1 Now earnings let investors play Darwin, picking winners and losers.

TJX (NYSE: TJX), the parent of Marshalls and T.J. Maxx, led the activity yesterday as traders amassed more than 7,500 August 72.50 calls for $1 to $1.20. Those contracts fix the price where investors can buy shares, which sets them up for potential gains if the discounter rallies:

  • The calls will double in value if TJX climbs 5 percent to $74.70 by expiration at the end of next week.
  • They’ll triple from a 6 percent move to $75.80.
  • Quarterly results are due next Tuesday, August 15 – before expiration. So those call buyers stand to profit from a potentially strong report.
  • However, should the stock fail to advance above $72.50, the calls will wither to nothingness. Breakeven is at $73.60.

TJX, slid 0.34 percent to $71.26. A robust balance sheet and a highly evolved business model kept it at the top of the food chain for most of this decade. But now even this leader is on pace for its first yearly decline since 2008. 

TJX (TJX) 2/14/17 – 8/9/17 chart

Source: OptionsHouse by E*TRADE

If traders think TJX will emerge alive and well from the retail ice age, they’re less confident in its department-store cousins. Macy’s (NYSE: M), for instance, found itself the target of downside options strategies on Wednesday:

  • Shortly after lunch, some 3,000 September 22 puts were bought for $0.97 and an equal number of September 26 calls was sold for $0.56. The bet cost $0.41 and will leverage a drop below $22. It will also force the investor into a short position if M rallies above $26, so might be hedging a long position in the shares.
  • Later in the hour, they got even more creative, writing 2,500 more of the September 26 calls, buying the September 22 puts, and selling the September 20 puts. The complex strategy cost a net $0.10 and targets a decline $20. It also has upside risk from a rally above $26.
  • M slid 2.08 percent to $23.03, and issues its results this morning. By the way, its peer JC Penney (NYSE: JCP) found itself in the crosshairs of put buyers earlier this week as well.

Despite all the doom and gloom, analysts think some other names will find a home in the new environment. Wal-Mart Stores (NYSE: WMT), they say, is making headway against e-commerce monster Amazon.com (NASDAQ: AMZN).2 Ralph Lauren (NYSE: RL) and Michael Kors (NYSE: KORS), are also considered to have found some safe niches.3

Bottom line: Traders continue to bet on winners and losers as conditions change in the retail space.

 

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1. CNBC: Holiday sales fall short of forecasts: NRF. 1/15/17. Investopedia: 2017: The Year of Retail Bankruptcies. 8/1/17.

2. CNBC: Wal-Mart shares just did something they haven’t done since 1995. 8/4/17.

3. Bloomberg: Ralph Lauren and Michael Kors Make Headway in the War on the Discount Rack. 8/8/17.