Traders stunned as retailers defy worst fears

Maybe the sky’s not falling for retailers after all. 

The retail sector came into this earnings season plagued by store closures, weak customer traffic, and the menacing growth of e-commerce juggernaut (NASDAQ: AMZN). But now that most companies have reported, some traders are wondering if they were too bearish on the space.

Just take kitchen supplier Williams Sonoma (NYSE: WSM), which has been in a steady downward trajectory since late 2015. Judging by yesterday’s options activity, someone was looking for another drop after earnings, but then had to reverse course after the company beat estimates. 

Less than an hour after the opening bell, a block of 15,000 September 45 puts was sold for $1.28 and a matching number of September 40 puts was bought for $0.18. Volume was below open interest in both, which suggests an existing bearish spread was closed. Here’s how it works:

  • Owning puts fixes the price where a security can be sold, so they make money to the downside. Writing them brings in a premium and creates an obligation to buy should a certain level be reached.
  • Combining the two is known as a vertical spread, letting traders control a move between two points over a certain period of time. In this case, they would have collected $5 if WSM dropped from $45 to $40 by September 15.
  • We don’t know how much they paid initially, but we know they got back $1.10 from exiting the position. (That’s the difference between the $1.28 received and the $0.18 paid.) 

We also know that they weren’t the only forlorn bear on Thursday because short interest accounted for more than one-fifth of WSM’s float. That means stock traders had sold borrowed shares, hoping for a drop that would let them buy it back cheaper. 

If rumors of WSM’s death were greatly exaggerated, is the online threat also overstated? The answer might be yes if you ask some other merchants. “Our e-commerce performance was outstanding,” declared the CEO of small-cap apparel name Express (NYSE: EXPR).1 Signet Jewelers (NYSE:  SIG) told a similar tale and highlighted the addition of a new online business. Both companies sported hefty short interest on the eve of their reports, and had their biggest rallies in at least a year after surprising to the upside. 

Guess? (GES) 1/31/17 - 8/24/17 chart

Source: OptionsHouse by E*TRADE. Circle shows moving-average cross.

Other firms are looking abroad—an interesting approach given rising optimism toward the global economy. “In Europe and Asia we have seen not only strong double digits growth for several consecutive quarters but also continuing margin expansion,” boasted the head honcho at Los Angeles-based Guess? (NYSE: GES). He added that the company is managing to grow despite shrinking its domestic footprint.2

GES may also be turning heads for some technicians after its 50-day moving average rose through its 200-day. Chart watchers often view that so-called “golden cross” pattern as an indication that long-term momentum has shifted.

Here are some other winners from this earnings season:

  • Abercrombie & Fitch (NYSE: ANF) had its biggest gain in more than a year after sales and profits beat estimates.
  • Dollar Tree (NASDAQ: DLTR) blew past consensus on the top and bottom lines. The discount retailer also staged its strongest rally so far in 2017.
  • Urban Outfitters (NASDAQ: URBN) combined some of themes above, targeting growth on both the Internet and overseas. The stock had its biggest rally in more than two years after reporting on August 15.

Bottom line: Retail pessimism ran high as earnings approached, but now same traders are wondering if they were too bearish on the space.


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1. Guess (corporate press release): Guess?, Inc. Reports Second Quarter Results. 8/23/17.