The retail sector puts off mixed signals

By
A A A

Michael Fowlkes 08/11/2014

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 ( AMZN ), 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 ( CVS ) 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 ( WAG ), 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 ( COH ) 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 ( TIF ) 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 entirely.

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).


Chart courtesy of stockcharts.com

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 protection.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: AMZN , CVS , WAG , COH , TIF

InvestorsObserver

InvestorsObserver

More from InvestorsObserver:

Related Videos

ColonialMills_USETBASITE
ColonialMills_USETBASITE            

Stocks

Referenced

Most Active by Volume

81,768,754
  • $74.11 ▼ 2.31%
77,395,717
  • $9.42 ▼ 5.80%
67,947,205
  • $17.02 ▲ 0.18%
53,864,169
  • $32.58 ▼ 3.95%
44,748,631
  • $11.32 ▲ 0.98%
42,926,278
  • $9.97 ▼ 9.03%
42,401,116
  • $41.80 ▼ 0.67%
39,870,972
  • $106.98 ▼ 0.34%
As of 10/30/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com