Target (TGT) has an image problem. Not only is the retailer often regarded as “the place you shop when you don’t want to be seen at Walmart (WMT)” — it’s also still trying to put the customer data breach behind it.
While TGT blamed much of its troubles in the first quarter on the breach, Target has the chance to repair more of that damage this Wednesday, when the retailer steps up to release its second-quarter earnings report.
Unfortunately for Target, the company has already set a negative tone for the most recent quarter, lowering its earnings expectations on Aug. 5 to 78 cents per share from prior estimates in a range of 85 cents to $1 per share. Wall Street analysts currently expect Target earnings of 80 cents per share on revenue of $17.39 billion.
Historically, TGT has had little trouble meeting or beating the Street’s estimates, with Zacks data indicating that Target has accomplished this feat in every quarter during the past five years. But investors likely won’t place too much focus on second-quarter results, choosing instead to dig through Target’s guidance.
If Walmart’s recent second-quarter results are any indication (rising revenue, flat sales, and a lowered profit outlook), Target stock may be in trouble.
It should come as no surprise, then, that TGT stock has very few Wall Street bulls behind it. Among the brokerage community, Target stock has garnered only seven “buy” ratings, compared to 15 “holds” and five “sells.” Additionally, the 12-month consensus price target of $59 per share rests mere pennies above the TGT’s close at $58.20 on Friday.
Contrarians might say “There is room for improvement here,” but the fundamentals and TGT price action offer little in the way of a contrarian read.
Pessimism also is thick in the options pits. Specifically, there are nearly 40,000 TGT puts open in the August/September series of options, compared to roughly 30,000 calls. The result is a bearishly skewed put/call open interest ratio of 1.35. This high reading carry’s even more weight given that investors are typically more optimistic heading into an earnings report.
Click to Enlarge Overall, implieds on weekly Aug. 22 options are pricing in a potential post-earnings move of about 3%. This places the upper bound near $59.70, which lies just above Target stock’s major trendlines, but below round-number resistance at $60. The lower bound, meanwhile, lies at $56.30 — just above a technical support zone in the $55-$56 region.
2 Options Trades on TGT Stock
Bear Put Spread: Traders looking to side with the bears ahead of TGT earnings might want to consider a Sep $55/$60 bear put spread. At last check, this spread was offered at $2.32, or $232 per pair of contracts. Breakeven lies at $57.68, while a maximum profit of $2.68, or $268 per pair of contracts, is possible if Target stock closes at or below $55 when September options expire.
Ratio Spread: Alternately, if you are willing to take on more risk, a weekly Aug 22 $55.50/$54 ratio spread has serious potential. To enter this spread, you would purchase one Aug $55.50 put, last offered at 25 cents, while simultaneously selling three Aug $54 puts, last bid at 8 cents each. The result is a total outlay of 1 cent, or $1 per set of contracts — excluding brokerage fees and margin requirements.
Breakeven lies at $55.49, and that’s a fair decline for TGT. But the real beauty of this trade is the considerable leverage, as a maximum profit of 49 cents, or $49 per set of contracts, is possible if TGT closes at $54 this Friday, when weekly options expire.
However, this leverage comes at a considerable potential cost. Specifically, to enter the spread you will be selling two uncovered Aug $54 puts (the third Aug $54 put is covered by the purchased Aug $55 put). Should TGT close below $54 on Friday, you could be assigned two shares of Target stock for every set of contracts purchased, at a price of $54 per share.
As you can see, while the potential for profit is significant, your losses could mount quickly if support near $54 (TGT’s annual low) doesn’t hold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.