Shares of Abercrombie & Fitch Co. (ANF) have been in a free fall during the past couple of months, with ANF stock shedding some 35% since late-August. The company has struggled to remain relevant to its core teen demographic, announcing in early November that same-store sales dropped 10% year-over-year. As a result, Abercrombie cut its third-quarter earnings outlook and said it expects third-quarter sales to decline 12% year-over-year.
The Street finally will get to see Abercrombie earnings for Q3 this week as the company is set to offer up its quarterly earnings report ahead of Wednesday’s open.
Wall Street has adjusted its earnings expectations considerable during the past several weeks, with the consensus target falling from earnings of 68 cents per share of ANF stock to about 41 cents per share currently. Revenue, meanwhile, is expected to come in at $918.30 million for the quarter.
Historically, Abercrombie has been a solid performer on the earnings front, with the company topping Wall Street’s estimates in each of the past four reporting periods by an average of roughly 36%. It should come as no surprise, then, that EarningsWhisper.com reports that Abercrombie’s third-quarter whisper number arrives higher than the consensus at 42 cents per share.
The optimism surrounding Abercrombie ends with the whisper number, however. According to Thomson/First Call, ANF stock has attracted only 10 “buy” ratings, compared to 21 “holds” and one “sell.”
Meanwhile, short sellers have loaded up on ANF positions. Specifically, some 20.9 million shares of ANF stock are currently sold short. This wealth of short interest represents nearly 30% of the stock’s total float, or shares available for public trading.
What’s more, options traders are also betting heavily against ANF stock. Currently, the December/January put/call open interest ratio arrives at 1.76, with puts easily outnumbering calls among options set to expire within the next two months. Zeroing in on December options (i.e. those most affected by this week’s earnings report), ANF’s put/call open interest ratio balloons to a reading of 2.2, with puts more than doubling calls.
Click to Enlarge Technically speaking, ANF is trading at oversold levels near fresh annual-low territory. The shares are hovering just above support at 28, with potential short-term resistance at 30. The next potential level of resistance lies at 33, which is home to ANF’s 50-day moving average.
Overall, implieds on weekly December options are pricing in a potential post-earnings move of about 8.6% for ANF stock. This places the upper bound at $31.50, while the lower bound lies at $26.50.
With the worst of Abercrombie’s quarterly report already telegraphed (hopefully), the stock trading at oversold levels and the holiday shopping season hitting full swing, I’m inclined to bet against the grain on ANF.
Options Trade on ANF Stock
Those willing to take a chance on a contrarian play ahead of this week’s quarterly report might want to consider a Jan 2015 $29/$31 bull call spread. At the close of trading on Monday, this spread was offered at 71 cents, or $71 per pair of contracts.
Breakeven lies at $29.71, while a maximum profit of $1.29, or $129 per pair of contracts, is possible if ANF stock closes at or above $31 when January options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
