An options trade on two retailers reporting earnings this Thanksgiving week
Six well-known retailers release quarterly earnings this week. Kohl’s, Macy’s, Best Buy, Dick’s, and Burlington will report before the open on Tuesday, November 26th, and Nordstrom will report after the close. Their results may provide some insights into the state of the U.S. consumer going into the holiday shopping season and whether those that have grossly underperformed the market so far this year, such as Kohl’s (KSS) (-40% YTD), can catch up to their competitors that have significantly outperformed, such as Burlington Stores (BURL) (+47%). According to the New York Fed, household debt rose modestly in the third quarter this year, but delinquency rates remain elevated. Both companies saw revenues plummet during the pandemic shutdown, but since then, Burlington’s revenues have grown consistently, even as Kohl’s has languished. Kohl’s has managed to keep EPS relatively flat despite the top-line declines, while Burlington has seen EPS growth. These divergent growth rates — possibly due to differing customer demographics — have led to very different valuations. Kohl’s now has a price-to-sales ratio of 0.11 and is trading at less than 10 times forward earnings estimates and is beginning to look “cheap.” Whereas Burlington Stores, which appeals to a more brand-conscious and slightly more affluent demographic, sports a price-to-sales of 1.8 and is trading at 36 times forward earnings estimates. A reasonable valuation if the growth rates of the past year or so can be maintained, but towards the upper-end of an acceptable range if growth rates fall. KSS YTD mountain Kohl’s, YTD The Street view is that Kohl’s revenues will continue to face significant pressure. Some of this skepticism stems from “alternative data,” which refers to non-traditional data sets used in financial analysis to gain unique insights into market trends, consumer behavior, or company performance. Unlike conventional financial data — such as earnings reports, balance sheets, and economic indicators — alternative data is often gathered from unconventional sources that offer real-time or near real-time information, such as transaction data from credit card companies, foot-traffic data from mobile devices and even satellite images of parking lots. One source of this data is Placer.ai , which, among other things, “generates a panel of more than 25 million monthly average (mobile phone) users.” Of these, roughly 55% are on iOS and 45% on Android. According to Placer.ai data, observed customers rose 5% YoY on a 91 trailing-day basis at Burlington and fell 3.2% at Kohl’s stores. This proliferation of alternative data use among institutional investors can help explain why Kohl’s shares have lost more than 18% since October 21st, while Burlington has rallied more than 12% over the same period. The trade Assuming that the alternative data indicates these two companies’ respective performance and that the recent price action reflected a preemptive move, we might deduce that stock price moves post-earnings will be more muted, as some investors will have already positioned accordingly. Traders anticipating more modest moves want to sell options premium before an event. Burlington is implying an earnings-related implied move of greater than 8%, slightly larger than the 10-year average of 7.5%. Kohl’s stores implies an eye-watering 11.6% move versus a 10-year average of about 7%. To play for a move of 8% or less in Burlington, one could trade a November 29th weekly/March 260/320 strangle swap as follows : Sell BURL Nov. 29 $260 put Buy BURL March 21 $260 put Sell BURL Nov. 29 $320 call Buy BURL March 21 $320 call To play for a move of 11% or less in Kohl’s stores requires a slightly more nuanced strategy because, as a lower-priced stock, KSS doesn’t have longer-dated strikes that align perfectly with the shorter-dated ones available with the weekly options. Nevertheless, using “diagonals” as follows has payoff characteristics that are generally similar: Buy KSS Apr. 17 $15 put Sell KSS Nov. 29 $15.50 put Sell KSS Nov. 29 $18.50 call Buy KSS Apr. 17 $20 call DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.