by Joseph Hargett | May 27, 2014 9:39 am
Investors will be watching Abercrombie & Fitch (ANF) closely Thursday morning, as the formerly elite teen fashion retailer steps into the earnings confessional.
ANF stock has wilted as its parent has struggled significantly in the adapt-or-die marketplace of trendy teen fashions, with sales falling four quarters in a row and profits contracting 77% last year.
Changes are in the mix, however, as the company that once dictated teen fashion struggles to remain relevant. As such, investors will be keeping a close eye on Abercrombie’s earnings outlook.
For the record, Wall Street is projecting a nearly 5% year-over-year decline in revenue for Abercrombie, with sales seen coming in at $797.86 million. Earnings are also expected to decline sharply, falling from a loss of 9 cents per share last year to a loss of 19 cents in the most recent quarter.
Performance has been hit or miss for Abercrombie earnings recently, with the company topping Wall Street’s estimates twice and missing them twice during the past four reporting periods.
As such, the company has garnered little in the way of confidence among the brokerage community. According to data from Thomson/First Call, ANF stock has attracted some 21 “hold” or worse ratings, compared to just 14 “buys.” Additionally, the consensus 12-month price target for ANF rests a modest 18% overhead at $44 per share.
Elsewhere, short sellers are betting heavily against ANF stock. As of the most recent reporting period, some 15.2 million Abercrombie shares were sold short, accounting for more than 21% of the stock’s total float, or shares available for public trading.
While it would appear that there is ample fuel for a potential short-covering rally, it would seem that many short sellers are well hedged against any potential surprise. Specifically, ANF’s May/June put-to-call open interest ratio of 0.45 reveals that calls more than double puts among near-term options.
Peak call open interest totals 6,220 contracts at the deep out of the money May $43.50 strike, while the May $39, $39.50, and $46 strike each sport roughly 3,000 contracts in open interest. On the put side, the May 33 strike has attracted the most attention with 5,097 contracts in open interest.
Click to Enlarge Overall, weekly May option implieds for ANF stock are pricing in a potential post earnings move of nearly 10%. This places the upper bound near $40.70, while the lower bound lies at $33.32. Technically, the $40 level is well below ANF’s March peak near $43, while the $33 level is near a second layer of support for ANF stock below immediate support at $35.
Shares also are currently pinned between their 50- and 200-day moving averages.
Given ANF stock’s poor price action this year, and the company’s struggles for direction, there is a good chance that Abercrombie’s results and guidance will continue to be impacted by the company’s turnaround efforts. As such, there is a good chance that ANF stock will break to the downside in the wake of this week’s quarterly report.
Traders looking to take advantage of such a move might want to consider a June $37/$33 bear put spread. At the close of trading on Friday, this spread was offered at $1.44, or $144 per pair of contracts. Breakeven lies at $35.56, while a maximum profit of $2.56 is possible if ANF stock closes at or below $33 when June options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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