The earnings season is winding down, and while the majority of
companies have already announced their quarterly results, there
are still plenty of big names yet to announce. We have seen some
positive earnings reports, but as is almost always the case,
there have been enough negative surprises to spawn investor
concern ahead of the remaining retail earnings reports.
One of the most closely followed retailers is Amazon.com (
), which reported a much steeper than expected loss for its
second quarter. The company posted a loss of $0.24 during the
quarter, which was far worse than the $0.15 consensus estimate.
Amazon has always had earnings problems, so the quarterly loss
wasn't entirely unexpected, but missing by such a wide range sent
the stock into a tailspin, and it has yet to build any upward
momentum after its post-earnings sell off.
Drug retailer CVS Caremark (
) surprised in the other direction, reporting better than
expected results for its second quarter. The company reported
earnings of $1.13 during the quarter, outpacing the $1.10
consensus estimate. Walgreen (
), on the other hand, missed its estimate back in late June. The
stock did not move too much on the earnings miss, but has since
traded sharply lower after lowering its 2016 profit target.
In the fashion sector, Coach (
) has already announced its quarterly results, and after posting
better-than-expected numbers, the stock formed a bottom and is
once again trending higher. Coach is known as an upscale fashion
and accessory retailer, and its better than expected results
could foreshadow an upbeat report from upscale jeweler Tiffany (
) when it reports second quarter results August 27.
With such mixed results, it is difficult to put a finger on
the pulse of the overall retail sector, but there are reasons to
be optimistic. Consumer confidence has been improving, with the
latest report from the Conference Board indicating that consumer
confidence is currently at its highest level since 2007. Based on
this alone, you could assume that retailers would be thriving,
but it is obvious that this is still not the case, at least not
The earnings season may be drawing to a close, but there are
still reports due from some of the industry heavyweights,
including Wal-Mart (WMT) and Target (TGT), which report on August
14 and August 20, respectively. Both of these sector leaders
reported weaker than expected first-quarter results, and both
stocks have been struggling. Another disappointing report could
send either stock sharply lower.
So the real question is, what is the takeaway from what we
have seen, and how can we use this information as investors? My
takeaway is that rising consumer confidence bodes well for major
retailers, but that we have seen enough negative earnings
surprises that we should be extremely cautious before setting up
any trades on the sector.
A good way to go bullish, but cautiously so, would be with a
hedged trade on the Market Vectors Retail ETF (RTH). Among the
top holdings in the ETF are Wal-Mart, Amazon, CVS, Home Depot
(HD) and Lowe's (LOW).
By playing this retail exchange-traded-fund, you are able to
go bullish on the overall sector, and can do this in a way that
you are highly diversified. Using options to hedge the trade can
add a second layer of security to any position we establish.
A nice hedged trade on RTH would be the December 50/54 bull
put credit spread. In this trade, you would sell the December 54
put while buying the same number of December 50 puts for a credit
of 30 cents. This trade has a target return of 8.1%, which is
22.1% on an annualized basis (for comparison purposes only). RHT
is currently trading at $59.26, so the trade has 8.4% downside