5 Retail Bloodbath Earnings Trades

by Traders Reserve | August 13, 2012 1:34 pm

5 Retail Bloodbath Earnings Trades

Investors be wary, a bloodbath is coming.

This week a full menu of retail stocks come to the earnings reporting podium. With shares in the sector trading for high valuations, there is little margin for error making for fertile ground for put buying.

There will be no Fossil (NASDAQ:FOSL[1]) or JC Penney (NYSE:JCP[2])  rockets [3]this week. Those companies experienced sharp increases in share value thanks to short sale covering. This week the opposite will be true.

The stock market is on a bit of a rally thanks to better than expected economic reports and anticipation of more Federal Reserve easing. Unfortunately earnings are not strong enough to support current valuations.

At least that’s my theory.

The preponderance of companies reporting during this current season has been coming up short on the top line with many companies reducing guidance for the future. With the high hurdle of valuations in the way, any reports that fail to hit the mark will likely result in sharp share price declines.

Here are 5 retail stocks reporting this week that may get bloodied after disappointing earnings news:

1) Dick’s Sporting Goods

The sporting goods store reports results before the market opens on Tuesday (August 14). Watch shares fall if the company misses the mark. The problem for retailers like Dick’s (NYSE:DKS[4]) is discretionary income. Consumers simply don’t have extra money to spend. They can barely afford the essentials. In the last year shares have gained more than 60%[5]. At current prices shares trade for 20 times current fiscal year ending January 31, 2013 estimated earnings. That’s a steep price when growth next year is expected to run at 14%.

2) Saks

The upscale department store is looking to put in impressive results similar to rival Macy’s (NYSE:M[6]). I wouldn’t bet on it. The luxury space is getting squeezed[7] in the current economic environment. Despite the difficulties, shares of Saks (NYSE:SKS[8]) have gained 35% in the last year of trading.

The company reports results before the market opens on Tuesday (August 14). If the news is negative, the stock is likely to plummet. Analysts expect the company to report a loss of 9 cents per share. For the full year a profit is expected and analysts have the company growing profits by 20% from the current fiscal year ending January 31, 2012 to the next. With shares trading for 25 times current fiscal year estimated earnings a miss here could be disastrous.

3) The TJX Companies

TJX (NYSE:TJX[9]) is in the sweet spot of retail and yet I would be very nervous owning this name before it reports earnings on Tuesday (August 14) before the market opens. In fact I would look to own a put option here as the likelihood of a miss and big share price decline is greater than 50-50 at the moment.

Shares of TJX are near their 52-week high reflecting the optimism about their business model. The stock has gained 70% in the last year. In other words shares are priced for perfection — a perfection that we just are not seeing during this earnings season. I would be the opposite here. More problematic is that analysts have the company growing profits by 11% from the current fiscal year ending January 31, 2013 to the next. At current prices shares trade for a lofty 18 times current fiscal year estimated earnings.

4) Hott Topic

Specialty retailer Hott Topic (NASDAQ:HOTT[10])reports results on Wednesday (August 15) after the market closes. Thursday will be its blood bath! Shares are now just below $10 per share, but this stock traded in the sixes earlier this year.

In the last year of trading Hott Topic has gained 50%. Those moves have put the stock in heady territory that earnings might not support. Analysts do expect profits to grow by 19% from the current fiscal year ending January 31, 2013 to the next, but shares trade for 23 times current fiscal year estimated earnings. That’s too rich for my blood. Even if they manage to beat the number, if guidance is low shares could drop by 10% or more.

5) The Buckle

Buckle (NYSE:BKE[11])is another specialty retailer that is priced to fall when it reports earnings before the market opens on Thursday (August 16) . At that time we shall see just how much consumers are willing to pay for a pair of jeans and accessories. I’m not expecting a good number here.

Buckle shares have slipped in advance of what is expected to be a weak economy. I don’t think they have fallen enough. At $38 per share the stock is well above its 52 week low of $34. Analysts expect growth to hit a brick wall next year with profits expected to move only 4% higher from the current fiscal year ending January 31, 2013 to the next. At current prices shares still trade for 11.5 times current fiscal year estimated earnings. More bad news will have this stock testing its yearly low.

Endnotes:
  1. FOSL: http://studio-5.financialcontent.com/investplace/quote?Symbol=FOSL
  2. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  3. rockets : http://investorplace.com/2012/07/jcpenney-jcp-slippery-slope-shows-no-sign-of-slowing/
  4. DKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DKS
  5. shares have gained more than 60%: http://investorplace.com/2012/08/dicks-sporting-goods-dks-nke-ua-addyy-fl-cab/
  6. M: http://studio-5.financialcontent.com/investplace/quote?Symbol=M
  7. luxury space is getting squeezed: http://investorplace.com/2012/07/coachs-troubles-made-in-the-usa-coh/
  8. SKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SKS
  9. TJX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TJX
  10. HOTT: http://studio-5.financialcontent.com/investplace/quote?Symbol=HOTT
  11. BKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKE

Source URL: http://investorplace.com/2012/08/5-retail-bloodbath-earnings-trades-jcp-dks-sks-tjx-hott-bke/
Short URL: http://invstplc.com/1fvz3vm