Once the king of the electronics retailing space, Best Buy Co Inc (NYSE:BBY) has struggled under the yoke of growing competition from a flood of online retailers, not the least of which is Amazon.com (NASDAQ:AMZN).
In order to regain market share, Best Buy is restructuring, closing 66 stores this year and consolidating its Canadian operations.
On Thursday morning, BBY stockholders will be looking for signs that Best Buy management is moving the situation forward. Best Buy’s first-quarter earnings are expected to fall 12.1% year-over-year to 29 cents per share, with revenue seen dipping 6.2% to $8.5 billion.
Historically, the company has performed above the bar in the earnings limelight. In fact, Best Buy has topped the consensus estimate in each of its past eight quarterly reports. Analysts are expecting another beat on Thursday, with EarningsWhisper.com reporting a whisper number of 33 cents per share from Best Buy.
The brokerage bunch apparently has a lot of faith in Best Buy’s management. According to Thomson/First Call, BBY stock has attracted 19 “buy” ratings, compared to seven “holds” and one outright “sell” rating. The 12-month consensus price-target, meanwhile, rests at $43 and represents a reasonable premium of about 23% to BBY’s current perch near $35.
But not everyone is as rosy about Best Buy’s outlook at the brokerage community. Short sellers, for instance, increased their holdings by 6% during the most recent reporting period. As a result, 29.6 million BBY shares are currently sold short, representing 9.6% of the stock’s total float, or shares available for public trading — more than enough to spark a covering rally in the event of a strong quarterly earnings report.
Turning to the options pits, it would appear that short sellers are taking precaution heading into Thursday’s event. BBY’s May/June put/call open interest ratio currently indicates a heavy preference for call options, arriving at a low reading of 0.53. Furthermore, this ratio plunges to 0.45 when we zero in on just the weekly May 22 series, with calls more than doubling puts among options set to expire by the end of this week.
Click to Enlarge Overall, weekly May 22 series options implieds are pricing in a potential post-earnings move of about 6.4% for BBY. This places the upper bound at $37.24, while the lower bound lies at $32.76. Technically, a rally would place BBY stock above key resistance in the $37.50 region, potentially leading to heavy follow-through buying.
On the downside, BBY should find support in the $32 region, home to its January lows, thus mitigating any additional losses.
2 Trades for BBY Stock
Call Spread: Expectations for an earnings beat appear to be in the cards for Best Buy, meaning that BBY stock’s reaction could come down to guidance, and management appears to have that well under control. As such, traders looking to bet on a post-earnings BBY bounce might want to consider a Jun $35.49/$37.49 bull call spread.
At last check, this spread was offered at 63 cents, or $63 per pair of contracts. Breakeven lies at $36.12, while a maximum profit of $1.37, or $137 per pair of contracts, is possible if BBY closes at or above $37.49 when June options expire.
Put Sell: On the other hand, retailers have been hit hard this week, and Best Buy could have a high bar to hit in order to push BBY stock higher. The stock is trading above technical support, however, making a neutral position one to consider. Those with a bullish-to-neutral bias on BBY might consider a weekly May 22 series $32 put sell position.
At last check, the May $32 put was bid at 22 cents, or $22 per contract. The upside to this put sell strategy is that you keep the premium as long as BBY stock closes above $32 when these options expire at the end of the week. The downside is that should BBY trade below $32 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $32 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
